yum brands inc (yum) earnings report: q1 2016 conference ... · the following yum brands inc...

CompanyName:Yum!Brands,Inc.CompanyTicker:YUMSector:N/AIndustry:N/A

EventDescription:Q12016EarningsCallMarketCapasofEventDate:33.44BPriceasofEventDate:82.06

YUMBRANDSINC(YUM)EarningsReport:Q12016ConferenceCallTranscriptThefollowingYUMBRANDSINCconferencecalltookplaceonApril21,2016,09:15AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

SteveSchmitt;YumBrands;InvestorRelationsGregCreed;YumBrands;CEODaveRussell;YumBrands;InterimCFOMickyPant;YumBrands;CEOChinaDivisionLarryGathof;YumBrands;Treasurer

OtherPart icipants

DavidPalmer;RBC;AnalystJohnGlass;MorganStanley;AnalystJosephBuckley;BoAMerrillLynch;AnalystJohnIvankoe;JPMorgan;AnalystKeithSiegner;UBS;AnalystDavidTarantino;R.W.Baird;AnalystJeffreyBernstein;BarclaysCapital;AnalystHowardPenney;HedgeyeRiskManagement;AnalystBrianBittner;Oppenheimer;AnalystAndyBarish;Jefferies;AnalystKarenHolthouse;GoldmanSachs;AnalystJasonWest;CreditSuisse;AnalystAndrewCharles;Cowen;AnalystBrettLevy;DeutscheBank;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

AtthistimeIwouldliketowelcomeeveryonetotheYum!Brandsfirst-quarter2016earningsconferencecall.

(OperatorInstructions)

SteveSchmitt,VicePresidentofInvestorRelationsandCorporateStrategy,youmaybeginyourconference.

SteveSchmitt (InvestorRelations):

Thanks,Operator.Goodmorning,everyone,andthankyouforjoiningus.

OnourcalltodayareGregCreed,ourCEO,andDaveRussell,ourinterimCFO.Alsoontoday'scallisLarryGathof,Yum!'sTreasurer;andwe'reverypleasedtohaveMickeyPant,YUMChina'sCEO,onourcallaswell.

FollowingremarksfromGregandDave,we'llopenthecalltoquestionsfromtheentireteam.PleasekeepinmindMickyisdialinginfromShanghai,sotherecouldbeaslightdelayinsomeofhisresponses.

Beforewegetstarted,Iwouldliketoremindyouthatthisconferencecallincludesforward-lookingstatements.Forward-lookingstatementsaresubjecttofutureeventsanduncertaintiesthatcouldcauseouractualresultstodiffermateriallyfromthesestatements.

Allforward-lookingstatementsshouldbeconsideredinconjunctionwiththecautionarystatementsinourearningsreleaseandtheriskfactorsincludedinourfilingswiththeSEC.Inaddition,pleaserefertotheInvestorssectionoftheYum!Brandswebsite,www.Yum.com,tofinddisclosuresandreconciliationsofnon-GAAPfinancialmeasuresthatmaybeusedontoday'scall.

Wearebroadcastingthisconferencecallviaourwebsite.Thiscallisalsobeingrecordedandwillbeavailableforplayback.Pleasebeadvisedthatifyouaskaquestion,itwillbeincludedinbothourliveconferenceandinanyfutureuseoftherecording.

WewouldliketomakeyouawareofthefollowingupcomingYum!investorevent.Oursecond-quarter2016earningswillbereleasedonWednesday,July13.

Now,beforeIturnthecallovertoGregIwouldliketobringyourattentiontotwoitemsyoumayhavenoticedinyesterday'srelease.Firstisnewterminology.Wereportedcoreoperatingprofitgrowthof21%forthefirstquarter2016.Coreoperatingprofitgrowthisouroperatingprofitgrowthyear-over-yearexcludingforeigncurrencytranslationandspecialitems.

Second,aspreviouslyannounced,effectiveJanuaryofthisyeartheCompany'sIndiabusinessintegrateditsthreebrandsintoourglobalbranddivisions.Prior-yearfigureshavebeenrestatedintherelease.

Nowit'smypleasuretohandthecallovertoMr.GregCreed.

GregCreed (CEO):

Thankyou,Steve.Goodmorning,everyone.

I'mpleasedwe'reofftoastrongstartin2016,withbetterthanexpectedcoreoperatingprofitgrowthof21%inthefirstquarter.

Thisincludes42%growthinourChinabusiness,duetooutstandingChineseNewYearresultsatKFC,underscoringthepoweroftheKFCbrandinChinawhenwedeliverinsight-drivenmarketingthatresonateswithourcustomers.Companywide,allfourofourdivisionspostedpositivesame-storesalesandoperatingprofitgrowthinconstantcurrency.

Furthermore,weareontracktofinalizethespinoffofourChinabusinessbyyear-end,creatingtwopowerful,independent,focusedgrowthcompanies.

Asyousawinourrelease,we'reraisingfull-yearcoreoperatingprofitgrowthguidanceforYum!Brandsto12%from10%previously.Eventhoughitisstillearlyintheyear,weareconfidentabouttherevisedguidanceandwillupdateyouastheyearprogresses.

Today,I'llgiveyouanoverviewofeachofouroperatingdivisions,andthenDaveRussell,ourinterimCFO,willwalkyouthroughthefinancials.

Sofirst,China.FortheChinaDivision,same-storesalesgrew6%,ledby12%same-storesalesgrowthatKFC.OurKFCbusiness,asareminder,representsabout75%ofouroperatingprofitinChina.

WesawparticularsuccessatKFCduringtheChineseNewYearwithBucketMeals,whichwetailored

acrossfourcustomergroupsrangingfromkidsbucketstolargergroupmeals.Asaresult,bucketsmixhadamuchhigherpercentagethannormally.Thisliftedaverageticketaswefocusedmoreongrouplocations;andwegainedevenmoreconsumerinsightsthisyear,whichwillhelpourbusinessbothgoingforwardaswellasnextNewYear.

PizzaHutCasualDining,whichrepresentsabout25%ofouroperatingprofitinChina,remainedchallenging.Systemsalesdeclined1%,andsame-storesalesdeclined12%inthequarter.

Atoughmacroenvironmentandcompetitivelandscapecontinuedtoweighonperformance.We'readdressingthiswithurgency,butrealizearecoverywilltaketime.

SowrappinguponChina,we'repleasedwithourfirstquarter'soveralloperatingprofitgrowth,whichcameinwellaheadofourexpectations.Thestrongmarginperformancereinforcesourconfidenceinthefutureearningspowerofthisbusiness.Whenwegeneratesalesgrowth,profitflow-throughisimpressive.

AsStevementioned,MickyPant,ourChinaDivisionCEO,isonthecalltodayandwillbehappytoassistinansweringquestionsyoumayhaveontheChinabusiness.

Now,turningtoourthreeglobalbranddivisions.InourKFCDivision,same-storesalesgrew1%inthefirstquarter,or5%onatwo-yearstack.Operatingprofitgrew7%inconstantcurrencywhenadjustingforincrementaladvertisingspendintheUS.

Thedivisionopened79newinternationalrestaurantsin32countries.77%oftheseunitswereopenedbyfranchisees,and71%ofournewinternationalopeningswereinemergingmarkets.I'mencouragedbyourabilitytogenerategrowthinbothemerginganddevelopedmarkets.

Systemsalesininternationaldevelopedmarketsgrew5%,andininternationalemergingmarketsgrew8%.IrecentlyvisitedwiththeteaminCanadaandwasthrilledtoseetheassetsbeingupgradedandthemarketingpositionedaroundAlwaysOriginal.With6%same-storesalesgrowthinthequarter,I'dsayit'sworking.

I'malsopleasedtoseesuccessinemergingmarkets,whichareakeycontributortoKFC'sgrowthstory.KFCisafranchise-led,emergingpowerhouse,andI'mconfidentthebrandisgettingevenstrongerandwillproducestronggrowththisyearandformanyyearstocome.

PizzaHutgrewsame-storesales3%inthequarterandwasledby5%same-storesalesgrowthintheUS,whichmakesupapproximately60%oftotalsales.Our$5Flavormenuhelpeddrivesystemtransactions,withCompanystoresleadingtheway,up8%inthequarter.

Ourdisciplinearoundmakingiteasiertogetabetterpizzaisholisticanddrivingtraffic.Wearefocusedontheentirecustomerexperiencefromordering,payment,anddeliverytrackingtoourassetsandmenu.AndIbelievethisquarter'sresultsarefurthertestamenttoourmaniacalemphasisonthiswayofthinking.

Weareontracktoreplaceover1,300USovensin2016.Forthosestoresreplacingolderovens,thisshouldresultinaverageenergysavingsof25%inongoingoperationalcostsandafastercooktime.

Fromamarketingcalendarperspective,wearefocusingonbalancingpremiumpriceinnovation,suchasStuffedGarlicKnotsPizza,toprotectandimproveunit-leveleconomicswithcompellingvalueofferingssuchasourongoing$6.99ANYpairsdeal.Allofthiswillenableustoprovideourcustomerswithabetterpizzaatgreatvalue.

OurinternationalbusinessatPizzaHutsawsystemssalesgrowthof3%inconstantcurrencyanda1%declineinsame-storesalesinthequarter.SaleswereespeciallystronginLatinAmericaandCanada,butoffsetbyweaknessesinKorea,Australia,andIndia.

Wearecommittedtoofferingconsistent,everydayvaluetoourcustomersandwillleverageprovenvaluestrategiesacrossmarketswithsimilarcharacteristics.WehavehighexpectationsfortheinternationalPizzaHutbusiness.Overthelastfiveyears,wehaveopen1,200internationalrestaurants,andwewillcontinuetogrowthisbusinessovertime.

ThebottomlineisthatwehaveestablishedsolidmomentumwithourstrategyintheUS,especiallyaroundthe$5Flavormenu.Andaswerollthisoverallstrategyoutinternationallywehopetoachievesimilarsuccess.

NowturningtoTacoBell.Same-storesalesgrew1%,lagging6%growthayearago,andoperatingprofitgrew4%inthequarter.Restaurantsmarginswereanimpressive21%.

While1%same-storesalesgrowthisnotwhatwe'reusedtoseeingatTacoBell,thetimingofourkeylauncheshadanimpactonsame-storesalesgrowthforthequarter.TheQuesalupa,whichlaunchedinFebruary,mixedatalmost10%anddroveameaningfulliftintransactions.

Wealsolaunchedour$1breakfastmenuinMarch.The$1pricepointisconsistentwithTacoBell'sreputationasthevalueleaderinQSR.

TacoBell'snewbreakfast$1valuemenudifferentiatesitselffromthecompetitorsandputsitattheforefrontofvalueinagrowingdaypart.Wenowhave10$1itemsonthebreakfastmenuandareseeingbreakfastsalesholdat8%andtransactiongrowthaccelerating.

TheTacoBellteamisexhibitinggreatflexibilitytoreadandreacttothecompetitivevaluepressures,andadjustedtheir2016promotionalcalendaraccordinglytohighlightevenmorevalue.Insight-driveninnovation,cravablefood,andbreakthroughvalue--suchastheupcominglaunchesofthe$1BeefyCrunchBurritoandsteakvaluelaterthisyear--shouldboostsalesandfurtherthebrand'smomentum.

Sowe'reofftoagreatstartatYum!.Overthepastseveralquarterswe'vereallyhadthreebusinessesthatneededdramaticimprovement:KFCChina,PizzaHutChina,andPizzaHutUS.I'mpleasedthatwe'vebeenabletoturntwooutofthesethreebusinesses,asKFCChinaandPizzaHutUSareonmoresolidfooting.

Nowlet'sbeclear.We'renotoutofthewoodsonthesebusinesses,butwe'vemadealotofprogressandwe'llcontinuetofocusondeliveringbetterresults.

Asyou'veheardmesaybefore,thisisatransformationalyearforYum!aswefinalizethespinoffofourChinabusiness,creatingtwopowerful,independent,focusedgrowthcompanies.Ourbrandstrength,unwaveringfocusonthecustomer,andinnovativefoodofferingsdrivenbyconsumerinsightswillallowustogrowYum!intoanevenbetterglobalCompany.

ThisisanexcitingtimeandpivotaltimeforourCompany,andIlookforwardtowhatthefutureholds.AndwiththatI'llhandthecallovertoDave.

DaveRussell(InterimCFO):

Thanks,Greg,andgoodmorning,everyone.InmyremarkstodayI'llcoverthreeareas:ourfirst-quarterresults;ouroutlookfor2016;andanupdateonourplannedrecapitalizationandthespinoffofourChinabusiness.

AsGregmentioned,weareverypleasedwithourstrongfirst-quarterresults,wherecoreoperatingprofitincreased21%.EPSbeforespecialitemsgrew19%,includinga5-pointnegativeimpactfromforeigncurrency.

TheseresultswereledbybetterthanexpectedsalesandrestaurantmarginsatKFCChina.EPSalsobenefitedfroma5%reductioninourdilutedsharecountcomparedtoourfirstquarterlastyear,duetooursignificantsharebuybacksoverthepast12months.

I'llnowtakeyouthroughourresultsbydivision,startingwithourChinabusiness.FortheChinaDivisionoverall,same-storesalesgrew6%inthequarter.

KFCgrewsame-storesales12%,whichwassequentiallybetterthanQ4andexceededourexpectations.AsuccessfulChineseNewYearpromotiondroveresults.AsGregsaid,theKFCbrandinChinaisreallypowerfulwhenyoudeliverinsight-drivenmarketingthatresonateswithourcustomers.

Same-storesalesatPizzaHutCasualDiningremainedsluggish,declining12%inthequarter.WeareworkingtostartturningthePizzaHutbusinessaroundinadifficultmacroandcompetitiveenvironment.

Restaurantmarginimproved3.5percentagepointsversustheprioryearto22.4%,helpedbysalesleverageatKFC,productivityinitiatives,andcommoditydeflation,morethanoffsettingsalesdeleverageatPizzaHut.

WhileourfirstquarterisaseasonallyhighsalesperiodfortheChinaDivision,restaurantmarginsofover22%giveustremendousconfidenceinthefutureearningspowerofthisbusiness.Whenwedeliversolidtop-linegrowth,theprofitsareimpressive.

OneothernoteonChina'sfirst-quarterresults.Wehadaleapyearbenefitthataddedanadditional$6millionofoperatingprofitinQ1toChina'sresults.However,wepulledsalesfromtheleapdayoutofoursame-storesalescalculation,sincetheextradayhadnoimpactonourreported6%same-storesalesgrowth.ThewayourreportingcalendarsworkhereatYum!,noneofourotherdivisionssawanyimpactfromleapyearinQ1.

NowmovingtoourglobalKFCDivision,whichposteditsninthconsecutivequarterofsame-storesalesandprofitgrowth.Emergingandinternationaldevelopedmarketseachgrewcomps1%.TheUSrecordeditsseventhconsecutivequarterofsame-storesalesgrowthdespiteoverlapping7%compsinthefirstquarteroflastyear.

Operatingmarginsimproved30basispointsinconstantcurrency,andcoreoperatingprofitgrew4%inthequarter.Adjustingfortheincrementaladvertisingexpenseassociatedwiththeaccelerationagreementwereachedwithourfranchiseesin2015,coreoperatingprofitgrew7%inthequarter.

Asareminder,theaccelerationagreementwithourUSfranchisees,whichwentintoeffectduringthesecondquarteroflastyear,callsforustoinvestincrementalmediaof$20millionin2016asopposedto$10millionlastyear.

OurglobalPizzaHutDivisiondelivered3%same-storesalesgrowthforthequarter,ledby5%same-storesalesgrowthinourUSbusiness.Same-storesalesgrowthandlowerG&Aexpensesdrovecoreoperatingprofitgrowthof9%.

Thisisthebestresultwe'veseenonPizzaHutUSinyears,andwebelieveourstrategyisworkingtodriveincrementaltransactions.IampleasedtoseemomentumbehindthebusinessandbelievewecantransferourUSlearningstobenefitthesystemglobally.

Digitalcontinuestogrowinimportancetooursales,comprising46%ofUSdeliveryandcarryoutsales,a3percentagepointincreaseversusayearago.OnSuperBowlSundayalonewetookover500,000digitalorders,representingabout50%ofsalesonwhatwasanall-timerecorddayforthebusiness.

Withdigitalorderscomehigherlevelsofloyaltyandhigheraveragespend,sowe'reinvestingasyou

wouldexpect.Alongthoselines,wearemakingprogressinmigratingtoasinglepoint-of-salesystemintheUSbytheendof2017,whichwillallowustobemorenimbleaswerolloutdigitalinitiativesgoingforward.

Finally,TacoBellfacedincreasedvaluepressurefromtheburgerchainsinthefirstquarterandposted1%same-storesalesgrowth.Same-storesalesimprovedthroughoutthequarter,andweremainconfidentinachieving3%same-storesalesgrowthfortheyear,withastrongersecondhalfthanfirsthalf.

Despitethelowerthanexpectedfull-quartersales,operatingmarginimproved150basispointsto28%andoperatingprofitgrew4%.Restaurantmarginsalsoimproved150basispointsat21%,andweexpectfull-yearmarginstobegreaterthan20%thisyear,albeitslightlylowerthanlastyear.

Onthedevelopmentfront,weopened49newrestaurantsinthefirstquarter,with90%openedbyfranchiseesandlicensees.Ofournewopenings,sevenwereinternationalunits.WeexpecttoopenarecordnumberofTacoBellunitsinternationallyin2016aswecontinuetomakeprogressinbuildingouttheunit-leveleconomicsasweenterintonewcountries.

I'dnowliketoshifttoour2016outlook.Withourstrongfirst-quarterresultsandthechangeinChina'staxlaws,wherebyavalue-addedtaxorVATisreplacingthebusinesstax,weareraisingourfull-yearcoreoperatingprofitgrowthforecastto12%from10%forYum!.ForalittlebitofbackgroundontheVAT,Chinarecentlyannouncedfurtherreformtoitsretailtaxstructure,whichisintendedtobeaprogressiveandpositiveshifttomorecloselyalignwiththemoremodernservice-basedeconomy.

Underthisreform,a6%outputVATwouldreplacethe5%businesstaxcurrentlyappliedtocertainrestaurantsales.InputVATwouldbecreditabletotheaforementioned6%outputVAT.ThischangeiseffectiveMay1,2016;soitinnowayhadanyimpactonourfirst-quarterperformance.

WhileitisdifficulttoestimatetheimpactofthisVATreformpriortoitsactualimplementation,YUMChinacurrentlyexpectsapositivefinancialbenefit,furtherenablingcontinuedinvestmentinthebusinessandcreatingthousandsofadditionaljobsinChina.

WhileweareraisingourforecastforcoreoperatingprofitgrowthfromYum!from10%to12%,we'remaintainingourguidanceforChinasame-storesalesof2%to3%forthefullyear.Fromamodelingstandpoint,therearetwootherthingstobearinmindasyoubuildyourforecast.

First,thesecondquarterinChina,whichistypicallyourseasonallylowquarter,happenstobeourtoughesthurdleoftheyearonatwo-,three-,andfour-yearstackedsame-storesalesbasis.Second,wehaveanRGMconventioninthesecondquarterthatwedidnothavelastyearthatweexpecttocostaround$7million.Itisimportantforyoutonotethesefactorswerefullyfactoredintoourinitialguidance,andourfirst-halfandfull-yearperformanceisexpectedtoexceedourexpectationscomingintotheyear.

All-inforYum!,weoutperformedourexpectationsinfirstquarterandareraisingourfull-yearguidanceto12%coreoperatingprofitgrowth,includingthe53rdweek.ThistakesintoaccountthestrongfirstquarterproducedbyKFCChina,weaknessatPizzaHutCasualDining,andtheexpectedVATbenefitinChina,inadditiontoourbranddivisionscontinuingtoproduceresultsconsistentwithourinitial2016targets.

Itisearlyintheyeartoraiseguidance,butwefeelconfidentgivenwherethingsstand,andwe'llupdateyouastheyearprogresses.

NowI'dliketoquicklyupdateyouonourspinoffplans.Weremainontracktocompletethespinoffbyyear-end.

WeplanonfilingourinitialForm10byearlyMayandconductingcomprehensiveroadshowsaheadoftheseparation.Thisspinoffwillestablishtwouniqueinvestmentopportunitiesandcreateoneofthelargest

US-listedChinaretailbusinesses.

AnotherkeyaspectofourstrategyistooptimizethecapitalstructureofYum!.Giventhesignificantimprovementwe'veseenrecentlyinthedebtmarkets,we'dliketoannounceanothermilestoneinourpreviouslycommunicatedplanoftargetingcompanywideleverageofapproximately5timesEBITDA.

InearlyMay,weplantoenterintoanewfinancingfacilityofatleast$2millionsecuritizingTacoBellUSroyalties.Asanextstepinourplan,subsidiariesthatoperateourKFC,PizzaHut,andTacoBellbusinesses,excludingtheTacoBellsubsidiariesincludedinthesecuritizationfinancing,areexpectedtoenterintoanewseniorsecuredcreditfacilityandissuenewhigh-yieldnotes.Moredetailswillbeforthcominginaseparatereleaselatertoday.

Inlinewithwhatwe'vepreviouslycommunicated,weplantocompleteourrightscapitalizationandhaveapproximately$9billionofdebtoutstandingbytheendofthesecondquarter.

Finally,sinceweannouncedinOctober2015ourintentiontoseparatetheChinabusiness,wehaveboughtback24.7millionsharesatanaveragepriceof$71,returningatotalof$1.8billiontoshareholders,excludingdividends.Aspreviouslyannounced,ourrecapwillenableustocompleteanadditional$4.4billionreturnofcapitaltoshareholders.

Soletmewrapthingsup.I'mpleasedwestarted2016offwithastrongquarter.We'reconfidentwe'lldeliver12%coreoperatingprofitgrowthforthefullyear,andwe'reproceedingasexpectedwiththeseparationofourChinabusinessintoanindependent,publiclytradedcompany.Weareworkingdiligentlytosetupbothcompaniesforfuturesuccessandlookforwardtoupdatingyouonanyprogressthroughouttheyear.

Withthat,I'llhandthecallbacktoGreg.

GregCreed (CEO):

Thankyou,Dave.

BeforewestartQ&A,IwanttoprovideabriefupdateonourplansfortheChinabusiness.Youmayhaveseenrecentnewsstoriesaboutasaleorapotentialstrategicinvestor.

IwanttoassureyouthatwearefullycommittedtomaximizingthevalueofourChinabusinessforthebenefitofourshareholders,andwewillcarefullyconsideralloptionstoachievethatgoal.

Asyouknow,weannouncedinOctoberthat,aftercarefulconsideration,webelievethatthebestwaytomaximizeshareholdervalueistospinoffourChinabusinessbytheendofthisyear,andwearemakinggreatprogresstowardsthespinoff.Wewon'thaveanyfurthercommentonthis.

AndwiththatIwillopenthecalluptoQ&A.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

DavidPalmer,RBCCapitalMarkets.

DavidPalmer (Analyst-RBC):

Thanks.FundamentalquestionaboutChinaforMicky,ifImay.RegardingPizzaHut,whathaveyoudonesofar,perhapseventhroughthesecondquartertodate,withregardtothemenuandthemarketing?I

knowyouwantedtogetbacktothatfive-stardiningatthree-starprices.Haveyoudonestuffsofar?Howisthatworking?

AndhowhasyourthinkinggenerallyevolvedaboutthetimetableforaturnaroundforthePizzaHutbrand?Thanks.

MickyPant (CEOChinaDivision):

Thankyou,David.Ihopeyoucanhearme,becauseIhadabitoftrouble;I'llspeakslowly.FirstonPizzaHut,IjustwantedtosaytoallofyouthatitisanextremelystrongbrandinChina.Allourconsumermetrics,thebrandimagetrackingthatwedoregularly,showsthatbrandregard,valuescores,foodscoresareveryhighandthey'verecoveredfullyfromthecrisisthatwehadacoupleofyearsago.

Weopened280newPizzaHutslastyear,andnewunitreturnsareverygood.Overthelastfouryearswe'veopened1,000PizzaHutdine-inrestaurantsalone,andwedwarfthecompetition.Soitisaverystrongbrand.

Itistruethatsame-storesaleshavebeennegative.Butin2015,forexample,oursystemsaleswereup10points,andwedotrackthroughCRESTin22citiesandalsothroughpubliclyreportedcompaniesthatoperateincasualdiningheretheoverallcasualdiningperformance.Anditisourunderstandingthatwegainedmarketshare.

Partofthereasonthecasualdiningsectorhasbeenhithasbeenduetoadeclineinconsumerconfidence.AsweexplainedinDecemberlastyear,partofitwasonaccountofthefactthathomedeliverytoaggregatorsisgrowing.

Thislatterphenomenonhastaperedoffabitonaccountofburnouts,etc.,sowefullyexpectthatPizzaHutwillturnthecorner.Itisastrongbrand;themarginperformancehasbeengood.Oursaleswereminus1%systemsalesinthefirstquarter,butourgoalistogettosame-storesalespositive.

Icannotputadateonit,David,becausethemarketisvolatile.Butwe'redoinganumberofthings.

Firstisthatwehaveshiftedthefocusbacktothecoremenuwithalotofpizzaactivity.Sowewillhavemorepizzainnovationinthenextsixmonthsthanwe'vehadinalongtime,andthesehavetestedverywell.

Thesecond,Ibelieve,isourvaluescoresareactuallygood.YoucaneatlunchataPizzaHutatjustalittlemorethanataKFC,sothereisnoneedforanymargincompression.

Butwedoneedtocommunicatethatvaluebetter,whichwehavestarteddoing.We'veclarifiedthebrandpositionsignificantly,andwe'vehiredoneofthebestcelebritiesinChinatobringthatpointhome.

Andlastly,wecontinuetoemphasizecustomerservicethroughtheprogramsthatwepresentedinDecember.SowiththatIfeelmuchbetteraboutPizzaHutthanIdidafewmonthsago.Butofcourse,I'mdisappointedthatsame-storesalesarestillnegative.

Imightalsoremindyou,asyouknowverywell,thatPizzaHutisabout25%ofoursalesandourprofits.SoonewaytolookatitisthatthreeofthefourenginesthatdrivetheYUMChinabusinessareKFC;andwithKFCperformingwell,IthinkwehavetheabilitytosortPizzaHutincomingquarters.

Operator :

JohnGlass,MorganStanley.

JohnGlass (Analyst-MorganStanley):

Thanksverymuch.Micky,I'llkeepyouontheline.OnKFC,youtalkedaboutBucketpromotionbeinganessentialdriver,sohowmuchofthesuccessinthefirstquarterwasrelatedjusttothat?

Iguessrelated,ifitwasvery--ifitwasasuccessfulpromotion,howmuchofthatsustainsgoingforward?Ifyoucantalkaboutsustainabilityofthosesales,maybesincewe'rewellintoAprilhere.

Canyoualsojust--commoditiesweresignificantlydeflationarythisquarter.Ithinktheyaresupposedtobeupthisyear.Soareyouchangingyourviewoncommodities,orwasthisjustthetimingofbettercommoditiesinthefirstquarterbutnotfortheyear?

GregCreed (CEO):

John,it'sGreg.Imightjust(multiplespeakers)Micky,Iwasjustgoingtojumpinfirstandthen,obviously,letyouprovidethedetail.Look,firstIwanttocommendMickyandtheentireChinateamforwhatIthinkisafantasticQ1.KFCChinadelivered12%same-storesalesgrowth;andasyoucanseefromthe42%growthinopprofit,theearningspowerofthebusinessisextraordinarywhensalesareworkinginourfavor.

We'reveryencouragedthatwe'venowhadthreeconsecutivequartersofsame-storesalesatKFCChina.Ithink,fortunately,wedidn'tassumeandwedon'tneedheroicnumberslikethistocontinuethroughouttheyeartoreachour2016guidanceof2%to3%same-storesalesgrowth.AndrecenthistoryshowsthatsalesinChinahavebeendifficultforustocall.

Regardingourexpectationscomingintotheyear,KFCsaleswereobviouslymuchbetterinQ1thanwecould'veimagined.InQ2,we'reclosertowherewethoughtwe'dbeforKFC,aswebelievethatoursuccessfulChineseNewYearmayhavepulledforwardsomeofourearlyQ2salesintoQ1.

Thatsaid,sixweeksintothequarter,KFCsalesareslightlypositive,andwe'reencouragedbywherethebusinessisgoing.Obviously,I'llletMickyspeaktothatinmoredetail.

Asweknowthatwe'vestillgotalotworktodoonPizzaHutinChina.Quarter-to-datesaleshaveremaineddouble-digitnegative.ButagainasDavementioned,ourQ2lapsatbothKFCandPizzaHut'smoredifficult,especiallywhenyoulookatthesemultiyearstacks.

Wefeelgreataboutthestarttotheyear.We'reconfidentlyraisingourguidance.WestillexpectChinafull-year--ChinaDivisionsame-storesalestobeinthe2%to3%range,whichisconsistentwithourexpectation.

Sowiththat,I'lljustletMickytakeover.IjustwantedtocomplimentMickyandtheteamforajobwelldone.

Thankyou,Greg.Ithink,John,thereweresomefactorsthatwereuniquetoQ1,andthatistodowiththeChineseNewYear.ItwastheYearoftheMonkeyandwewerefortunatethatthe--actuallyitwasnotjustfortune,buttheteamofKFChasreallyhittheirstride.JoeyWatt,whoisaveryaccomplishedretailexecutive,hasnowreallyunderstoodtherhythmoftheKFCbusiness,andtheyputtogethera1,2,3puncharoundtheChineseNewYear,extendingitfromthetraditional10daystoaboutfourweeks,centeredaroundaverypowerfulBucketpromotion,butalsothanwithactivityafterwardsfeaturinga[greater]sandwich,whichwasgoodthinking,becauseafteraheavyChineseNewYearpeoplearelookingforahealthierfare.

SothataspectwasuniquetotheChineseNewYear,andIthinkitwasaspectacularlysuccessfulpromotion.Somebodyaskedmehowwe'lleverlapthatnextyear,andIthinktheonebitofgoodnews

wehaveisnextyearisactuallytheYearoftheChicken.Sowestartedworkalreadyonthepromotionsthatwillberunning.

ButsomeofthefactorsthatworkedinQ1actuallygivemeencouragementforKFCoverall.Thefirstisthesuccessofsellingourcoreproducts:friedchicken,hotwings,frenchfries,eggdots,andallthefamiliarfavoritesinChina.WeareextendingthatprinciplebydoingmoreactivityaroundBucketsinthebackhalfoftheyearandalsointroducingBoxMeals,whichareaproveninternationalsuccess,whereyoucanbuyafairly,agood--it'saslightlylittlebitmoremoneybutsignificantlymoreproduct.

Asyoucanimagine,followingaverylargesuccessinJanuaryandFebruary,wehitalmostrecordvolumesintheamountofchickenthatwedidsell.Andalso,thatsalewasaccompaniedbycorrespondingtraffic.Theticketimpactonoursalesofplus12%inQ1wasabout3%.Soitwasn'tasthough--sorry,thepricingimpact.

Soitwasn'tasthoughwetookpricingtogetthere.Thepriceimpactwasonlyplus3%.

Therestofitwasonaccountofthefactthatpartysizesfortheselargebucketswereverylarge.Andalsotherewasasignificantincreaseinthenumberofitemsboughtperperson,becausethepromotionwasverywellrun.

InQ2we'reabouthalfwaythroughthequarter.ThepleasingthingisthatKFCispositive.ButasGregsaid,there'salotofvolatilityaroundit.

It'sadifficultquarterbecausewe'vegottoughlaps.We'vehadsomeexpenses.

OurgoalasateamhereistomakeQ2thisyearthefourthconsecutivequarterofpositiveKFCsame-storesales.ButIcannotsaythatthat'saguaranteeuntilwehavemorevisibility.

Butthefactthattheflow-throughwasverystronginprofitterms,thesimplificationofthemenuboards,whichwaswellconducted,thestrengthofthemarketingcalendarinthebackhalfgivesmeandtheteamalotmoreconfidencethatwehadsixmonthsago.

Thanks,Micky.

First,tofurtherwhatMickysaidalittlebit,too--thetimingofChineseNewYear,withitbeingalittlebitearlierthisyear,didprovideaslightbenefittoQ1whichwillbealittlebit--hurtsQ2alittlebit.Sothatwasalittlebitonthesalesline.

Asfarasyourcommoditiesquestion,John,wesawa2%declineincommoditiesinChinaduringthefirstquarter.Andwearestillonourforecastforplus1%forthefullyear.

Operator :

JosephBuckley,BankofAmerica.

JosephBuckley(Analyst-BoAMerrillLynch):

Thankyou.Yougavealittlebitofthisinanswertothelastquestion,butcouldyoutalkabouttrafficversuspriceversusmixforbothKFCChinaandKFCPizzaHutduringthequarter?

Joe,it'sSteve.Forthedivision,wehadabout--forthe6%compforthedivision,wehad9pointsofcheckgrowthanda3-pointdeclineintransactionsoverall.

Okay.Presumably,though,positivetransactionsatKFC?

That'sthenumberforthedivision.

Yes,wehadpositivetransactionsatKFC.AsIsaid,thetransactionnumberaswemeasureditisthenumberofticketswecutinthestore.But,asIexplained,thesizeoftheticketwasbiggeronaccountofshareablemeals,principallytheBucket.

Soweestimatethatthepriceimpactonoursaleswasabout3%,andtherestofitwasonaccountoftrafficplusalargercheckonaccountofmoreitemsbeingbought.Soitwasafairlyhealthygrowth.

Thankyou.Thenjustswitchingtopicsforamoment,PizzaHutUSnumberslookprettygood.PizzaHutinternationalslightlynegative.

CanyoutalkalittlebitaboutPizzaHutinternational,andwhat'sgoingonthere,andwhatchangesyoucouldimplementthere?

GregCreed (CEO):

Yes,certainly,Joe.Ithinkthegoodnews,asyousaid,isPizzaHutUShadanexcellentquarter:same-storesalesup5%,Companytransactionswereup8%.Ithinkacombinationofthe$6.99pairsandthe$5Flavormenuhavecertainlyworked.

Obviouslywhatwe'redoingnowisintheprocessoftakingthatsuccessandallthetacticsthatareassociatedwiththatandexpandingthatrapidlyonaglobalbasis.Likeallthings,thisbusinessisverymuchdrivenbyourUSsuccess,andIthinkwhatwe'redoingnowisintheprocessofrollingoutthatUSsuccessandtakingitaroundonaglobalbasis.

IhappenedtobeinThailand,actuallyinJanuary,earlierintheyear,andyoucanseealreadythatthatteamwasstartingtotakethesuccessfultacticsthatwereworkingandstarttoseehowwecanimplementthoseinthatcountry.Andthat'shappeningaroundtheworld.

Operator :

JohnIvankoe,JPMorgan.

JohnIvankoe (Analyst-JPMorgan):

Thankyouverymuch.Twounrelatedquestions,ifImay.Firstoneforyou,Micky.

Foranumberofyearsnow,laborcosts,labordollarsperoperatingweekinChinahavebeenaprettymajorcontributortomargins.Asyoudoplantoregrowcustomertraffic,obviously,inthesegmentandwanttostaycompetitivewithwages,areweatthepointnowwherelaborstartstoinflecttheotherway,andaddingbackcostsintothesystemthathavebeentakenoutoverthelastseveralyears?

Well,it'struethatoverthelastfiveyearslaborhasinflatedinChinaonaccountofminimum-wageincreasesbythegovernment.Butwe'veseenamoderationofthat.Ithinktheauthoritiesrecognizethattheeconomyhastobesupported,soIthinkwe'reseeingamorereasonablepicturethere.

Whatwedidgetinthequarterparticularlywassomegoodproductivitygainsonaccountofusingmorepart-timeandstudentlabor,whichisaphenomenonthatdidnotexistinChinainthelongpast,andthatismakingadifference.Solookingforward,it'salwaysarisk;butIdon'tseelaborpriceinflationasbeingasignificantrisk.

Ithinkthekeyforusisgoingtobeproductinnovation,sensiblepricing,andgettrafficscoresback.SoIhopethathelps.

Okay,thankyou.Thensecondly,Ithoughtthecommentaryonthecapitalstructurewasinteresting,inthatpartofthenewcapitalstructureisgoingtobearoyaltysecuritizationonlytoTacoBell,whichIdon'tthinkyourpreviousdebtactuallyassigneditselftoindividualbrands.SoIjustwantedtounderstandthesymbolismbehindthedebtsecuritythat'sonlyrelatedtoTacoBell.

Couldpeople'simaginationstarttothinkthatTacoBelldoesn'tnecessarilyremainapartofYum!overthelongtermifanopportunityarises?

LarryGathof (Treasurer):

Hi,John;it'sLarryGathof.I'llanswerthedebtaspectofitanyways.Butwhatwe'redoingiswe'retryingtotakeadvantageofthedebtmarketsintotal.Sowe'relookingatdoingbothasecuritization,bankandbonddebt;sowe'reputtingdebtacrossallthedifferentavenuestoagaingetthebestpricingandoptimizeourbalancesheet.

TheTacoBellsecuritizationisonlygoingtobeontheUSTacoBellfranchiseandlicensefees.Soit'sjustthatpart.

TherestoftheTacoBellbusinesswillalsobepartoftheotherborrowings.Soagainthesecuritizationmarket,quitehonestly,isn'tdeepenoughtodoanyoneofourentirebusinesses;sowejustpeeledoffthepiecethatwethoughtwasmostappropriateforasecuritizationandareaccessingthatmarket.

Thenagain,we'llhavethebalanceoftheborrowingsacrossallthreebrandsafterthat'scompleted.

GregCreed (CEO):

John,toputitbluntly,Iwouldn'twantanyonetotakeawayanythinkingthatwe'regoingtobedoinganythingtoTacoBell,otherthanloveitasapartoftheportfolio,loveitsgrowth,loveitsprofitcontribution,andlovethatitisabrandthatwecantakeglobal.

Thankyou.

Operator :

KeithSiegner,UBS.

KeithSiegner (Analyst-UBS):

Thanks.Greg.Justaquestionforyou,havingcomefromtheTacoBellbrandandhavingwatchedthatbrandbeoneoftheleadersintermsofoveralldigitalengagement,mobileordering,andmore.Wheredoyou--howdoyoufeelabouttherestoftheUSportfolioandpositioningnow?

Areyoumakingtheprogressyouwant?IsPizzaHutbecomingmoreofaleaderinitscategories?IsKFCalsocomingalong?

Andthenwhatabouttestsondeliveryforotherbrands?LikewholemealreplacementforKFCandevenforTacoBell.IstherestoftheUSportfoliocatchinguptoTacoBell?Wheredowestand?Thanks.

GregCreed (CEO):

Keith,goodquestion,andIwouldsay:Yes.IthinkthegreatthingiswecancodifywhatmakesTacoBellsuccessful;andobviouslytheothertwobrandscanobviouslytrackwithwhatthey'vedoneandobviouslyattempttoreplicateit,butintheirownbrandvoice.

SoI'mverypleasedwiththeprogressthatPizzaHut'smaking.Ithinkitspositioningaroundmakingiteasiertogetabetterpizza,Ithinknotonlythesalesgrowthbutthetransactiongrowththatwejustgot.Obviously,partofmakingiteasierwastogetourvaluebetteronPizzaHut,whichwe'vedone.

ButIthinkyou--aswealsosaidonthecall,weareinvestingintechnology.WedoneedtogetfromninePOSsystemsdowntoonePOSsystem.

Butaswealsosaid,46%ofourdeliverycarryoutsalesaredigital;andthat'sgrowing.SoIdothinkwe'remakinggoodprogressthere.

OntheKFCside,IthinktheAlwaysOriginalpositioning,themovebacktoFingerLickin'Good,thegreatthingaboutKFCintheUSisit'sthebrandthat'snowbeingtalkedabout.Ithinkforalongtimeitwasn'tonanyone'sradarscreen,soI'mverycomfortable.

IthinkthelaunchofNashvilleHothasreallyhelped.Obviouslythereisavaluegamebeingplayedbytheburgerboysbecauseofbeefpricing;butIthinkthereturnto$5boxeshasbeenagoodmovebytheKFCteam.

AndthenforTacoBell,yes,theanswerisIthinkwe'renowin500storesdoingdeliveryinacoupleofthekeycities--LosAngeles,SanFrancisco,Dallas;I'mnotquitesurewhereelse,but--sothat'sbeenexpanded.

Ithinkifyoujusttaketheoverallconceptofeasybeatsbetter,whichIknowthePizzaHutteamoriginated,butwhatitbasicallysaysis:Yes,we'vegottofindwaystomakeiteasierforourpeople,forcustomerstogettoourbrands.Wedothattwoways:webuildmoreunits,butwealsoobviouslywillstartlookingatdeliveryasawaytogetourfoodtocustomersintheirhome.

Soverygoodquestion.We'remakingprogress.Theotherbrands,Ithink,aremovingtowheretheTacoBellbrandstrengthis.

Alotofworktobedone,butIthinkwe'removingintherightdirection.I'mencouragedbythat.

Operator :

DavidTarantino,Baird.

DavidT arantino (Analyst-R.W.Baird):

Hi,goodmorning.Myquestionisontheguidancefortheyear.Iwaswonderingifyoucouldprovidesome

additionaldetailorinsightonwhatyou'reassumingforChinaprofitgrowthfortheyearinthatguidance;andmaybealsothemarginthatyouexpecttodeliverinthatbusinessforthefullyear.

Sure.ThefirstthingI'dsayisifyou'regoingtohaveagoodquarteratYum!youwantittobethefirstquarteroftheyear,whichiswhatwecertainlydidandhadablowoutquarterinChina.Whenwelookedatthatfirstquarter,aswellassomeoftheother--thetailwindswehaveinthebusinesswithregardstotheVATwetalkedaboutearlier--thoughit'sverydifficulttoquantifythebenefit;weknowthere'ssomethingthere--someofthecommoditydeflationthatwe'reseeing,wefeltveryconfidentthatevenwithsomeoftheotherheadwindswe'refacing,particularlyPizzaHutCasualDininginChina,ofgettingtoanumberthatwasup12%fortheyear.

Aswesaidwehavenotyet--wehavenotadjustedthesame-storesalesforecastforthebalanceoftheyearforChina.It'sjusttoodifficulttocallgivenwe'reonlythreeandahalfmonthsin.Butatthispointwefeelverycomfortablewiththe12%.

GregCreed (CEO):

Imean,thewayIlookatitistoraiseguidanceinthefirstquarterdemonstratesadegreeofconfidencewe'vegotintheyear.Aswesaid,therewillbesomeputsandcallsastheyearunfolds,nodoubt;butwefeltconfidentinraisingitfrom10%to12%.

YouaskedspecificallyaboutthemarginsinChina.Giventheyaresodependentuponsales,we'restillthinkingsomewherealong--we'renotcomingoffourguidancefromthebeginningoftheyeararound16%atthispoint.

DavidT arantino (Analyst-R.W.Baird):

IfI'mstillon,Iguessifthemarginguidancestillisaround16%fortheyear,IguessI'malittleconfusedonthat,giventheoverperformanceinQ1.Wastheresomethingthatchangedabouttheoutlookforthelastthreequarters?Oristhissomelevelofconservatismthatyou'rebakinginorperhaps--?

No,Idon'tthinkso.Idon'tthinkwe'rethinkingaboutitnecessarilyinthatlevelofdetail.Ithinkwe'resayingit'sjusttooearly.

We'reofftoagreatstart.WiththeQ1successthatwehadwefeelverygoodwiththe12%.ButIdon'tthinkyoushouldbereadingthatintothebalanceofyourforecast.

Operator :

JeffreyBernstein,Barclays.

Jef f reyBernstein (Analyst-BarclaysCapital):

Great;thankyouverymuch.Twothings.Justone,IwashopingtogetalittlebitmorecolorfromMickyontheChinaside.Obviously,withtheshort-termstrength,whichseemstobeattributedtotheNewYear'spromotion,justwonderinghowinyourmindyouperhapsseparatethatfromthelonger-termrecoveryefforts?

Justitseemslikeyou'reconfidentthatthebrandIthinkyousaidhasreallyturned.Butthenitseemslike

maybeinMarchandinAprilthingshavereallyeased.SoI'mjustwonderinghowyouthinkaboutthebusinessoverthenext12monthsintermsofjustshort-termspikesbecauseofpromotionversusthelong-termtrajectoryimproving.AndthenIhadonefollow-uponTacoBellUS.

Yes,well,thanks,Jeffrey.LikeIsaid,Ithinktheteamandmyselfarefeelingverymuchmoreconfident.Wejustthisweekhadallofourstoremanagers--wehadastadiuminthecityofDalianwith8,000people,talkingaboutthethemeforthefuture,whichisFromStrengthtoStrength.Inparticular,whentheKFCsectionwasdiscussedandweputoutplansfortherestoftheyearandthepositioningandtheproposedmarketing,therewasjustanunboundedconfidence.

SoIfeelthat--Ireallyfeelthebrandismakingalotofprogress.Itismuchstronger.Ithinkthepositioningisveryclear.Thecalendarsarestrong.

Wearedoingsensitivethingsaroundthecoreofthebrand.We'vealreadycleanedupthemenuboards;wewilldothatevenmore.We'reintroducingproveninternationalwinners.

IthinkyoualwayshavetobecautiouswhenyoucometoChina,becausethereiseconomicvolatility,andthereisalsounexpectedtwistsandturns.

Sothereisnothinghidden;itisnotasthoughweareworriedaboutsomespecificeventorthereissomethinghappeningthatcausesustoworry.Butyoujustwanttobecautious.We'vehadtwoorthreeyearsofalotofvolatility.

Sothewaywearelookingatitrightnowisit'sashowme,don'ttellmesortofstory.We'rehopingquarterafterquartertoimproveandstrengthenthebusiness.

Ithinkit'sbeenmentionedanumberoftimesQ2isgoingtobeadifferentdifficultquarteronaccountofavarietyoffactors.Butweareveryfocusedonseeingwhetherwecandeliverpositivesame-storesalesandtakeitfromthere.

SoonKFCIfeelconfident.Ifeelthatthebrandismakingalotofprogress.

Theotherthingwedidn'ttalkabouttodayisthatwe'vespentalotofenergyandaregoingtobetakingverygoodcareofstorerefurbishment.Wehavegooddesigns,we'vegotgoodplansforaggressiverefurbsofsomeofourolderstores.Weareopeningasymbolicallyimportant5,000thstoreinShanghai,whichis,Ithink,maybethebestKFCintheworld.It'sastate-of-the-artgreenstorewhichwillopennextweek.SoIthinkthebrandismakingprogressoneveryfront.

OnPizzaHut,likeIsaidbefore,Iamverydisappointedatnegativesame-storesales.Idon'tseeanyreasonwhywecannotturnitaround.Thereisnointrinsicreason.

Allourscoresaregood;ourcompetitivepositionisfantastic.Therereallyisnointernationalcompetitorwiththename.Andinadditiontothe1,500dine-instoreswe'vegotabout300deliveryunitswhichdwarfthecompetition.

SoIfeelthebrandsaretechnologygenuinelymakingprogress.It'sjustthatit'sbeentwomonths--thefirstquarterwastwomonths.Andtomakeacallontherestoftheyearknowingwhatwe'veseenoverthelastthreeyearsseemstobeoutoftheboundsofwhatweshouldbedoing.Sothathopefullygivesyousomecontextonthewaywe'relookingatit.

Jef f reyBernstein (Analyst-BarclaysCapital):

Forsure.ThenGreg,Ijustwantedtofollowup.YoumadeacommentabouttheTacoBellUS.Itseemslike

maybeitwasalittlelightofyourinternalexpectation,whichIthinkyouattributedtomaybesomeoftheQSRburgercompetitorstakingadvantageoffavorablebeef.

SoI'mjustwondering,justtogetabetterunderstandingofyourresponse,doesitseemlikegettingmoreaggressivepresumablyonvalue?Iknowyou'veobviouslybeenwiththebrandforalongtimeandgonethroughthesephasesbefore.Butjusttheideathatyou'dprogressivelypursuethediscountingversusstayingthecoursewithyourinitialplan,justtryingtogetyourthoughts.

GregCreed (CEO):

Sure,Jeffrey.IthinkthefirstthingIwanttodoisjustcorrectit.ApparentlyinmypreparedremarksIthinkIsaidthebreakfastmixwas8%;it'sactually6%.The8%isactuallythetransactiongrowththatwegotinbreakfastinQ1,soIjustwanttoclarifythat.

Bytheway,I'mveryhappywith8%transactiongrowthinbreakfast,withoneofourcompetitorsdoingAllDayBreakfast.Soletmejustsaythat.

Toansweryourquestion,yes,wehadtiedthelaunchoftheQuesalupatotheSuperBowl.ItriedtogettheSuperBowlbroughtforwardacoupleofweeksbecausethatwouldhavereallyhelpedus,butunfortunatelytheNFLwasn'tgoingtoplayalong.

Soweweresotieduptothelaunchwiththateventthattherewasacoupleofweekswherewewerealittlenaked,Iwouldsay.Soobviouslysalesandtransactionsuptothereweresoft.Thegoodnewsisthatafterthatevent,theQuesalupahasmixedatover10%andhasdonewellforus.

ButIthinkevenmoreimportantlyBrian,whoisdoingagreatjobleadingthebrand,heandtheteamhavealreadychangedthecalendar.Infacttoday,wewilllaunchsomenew$1itemsintothemarketplace.Therehavebeenanumberofrevisionstothecalendar.

SoIthinkwecanstillbeanincrediblyinnovativebrand,asociallyconsciousbrand,ledbydigital.Butwecanalsojustgetourvaluesoit'smorethancompetitiveinthemarketplace.

IthinktalkingtoBriantheotherday,heandIstillhavealotofconfidencewe'lldelivertheatleast3%same-storesalesgrowthfortheyearatTacoBell.

Operator :

HowardPenney,HedgeyeRiskManagement.

HowardPenney(Analyst-HedgeyeRiskManagement):

Hi;thanksverymuch.IwaswonderingifyoucouldhelpmewithChinesecultureandwhatthezodiaccalendarandchickenmeansnextyear,intermsofwhatthatassetpotentiallycoulddoforbusiness.Thanks.

Yes,Idon'tthinkitisaveryseriousfactor,frankly.TheYearoftheDragonandtheMonkeyareparticularsignificance.Everyyearisimportant.

OneinterestingfeaturethatJoeyandtheteamputtogetherwastheyactuallyintroducedaChristmasBucketin2015Decemberwhichwasreasonablysuccessful,sotheyaredialingthatup.IthinkthepointreallyisthatifyoudoagoodBucket-orientedcalendarinDecemberforChristmasandthenChineseNewYearnextyear,wecanlooktoagoodperformance.

ThesuccessoftheMonkey,theYearoftheMonkeypromotionhasshowntoustheimportanceofchoosingthecharacterwell--thetoysthatgowithit,thekidsmealsthataccompanyit--whichwillallhelpustobuildforthefuture.

Ithinktheyearofthechickendoeshelp.ThereisnobetterauthorityonchickenthanKFC.ButIdon'tthinkit'sgoingtobeculturallythatsignificantthatpeoplehavetoeatchickenintheYearoftheChickenorsomethinglikethat.

Soit'sahelp.AllIwassayingwasthattolapthisverysuccessfulYearoftheMonkeypromotion,that'sonelittlegiftonourside.

IfIcouldask--

Goforit.

Sorry;thankyou.Greg,ninemonthsagoobviouslythequarterwasn'tasstrongasyouwouldhavehoped.ThenwegothroughtheprocessofyouspinningouttheChinabusinessandtalkingaboutthechangeofthestructureoftheCompany;andnowninemonthsforwardthingslookalotbetter.

Iwaswonderingifyoucouldmaybeputtangibleevidencearoundanintangiblequestion.AndthatiswhatthechangesinternallytotheemployeesofYum!andYUMChinahavedonetohelpturnthebusinessaround.Idon'tknowifI'maskingthatcorrectly,butIthinkpartofthereasonfordoingthisspinwasmaybetofocusonthedifferentassets.

Thisobviouslywasafantasticquarterandforallthosereasons--maybesomeofthosereasons--I'mstrugglingtoaskthequestionproperly.Butjustwonderingifsomeofthe--thankyou.Sorry.Goahead.

GregCreed (CEO):

Howard,I'llhaveago.IthinkIcouldn'tbehappiertohaveMickyleadingtheteam.Mickyhasanenormousamountofjustexperience,hastheconfidenceofallofus,anddidanamazingjobrunningourinternationalbusinessforsuchalongperiodoftimeonallthreebrands.SoI'vegotaleaderintherewhoIhavetheutmostconfidenceinandwhohasralliedtheteaminChina.

We'vegotgreatpeopleleadingthebrands,JoeyandPeter.Theyarejust--they'rereally--IwasthereinMarchlookingattheplans,lookingatwhatthey'velearnedfromthelessons.OurcultureisaliveandwellinChina.SothewholerecognitioncultureandourbeliefthatculturefuelsresultsIthinkwasabsolutelyevident.

Ithinkatthesametime,what'salsohappeninginthewholebusinessisthatwe'regettingmuchbetteratbrandbuildingandstrengtheningourbrandpositioning.SoIthinkChina--Iwouldsaythewordsaren'texactlyalwaysoriginal;Ithinksit's:beyourtrueself.Buttheyprettymuchresonate.

We'venowgotthisbrandonaglobalpositioningsowecanleveragethings.Mickyhasreachedoutandtakenthingslikethe$5boxesthathavebeenincrediblysuccessfulinanumberofmarkets;ashesaid,theywillgointothemarketsooninChina.

ThePizzaHutteamislookingatanewpositioningforPizzaHut.And,asMickysaid,Ithinkfocusingonthepizzaandlessonthemoreandgettingbacktothecorewillhelpthatbrandaswell.

SoIwouldsumitupasanewleader,greatleader,freshperspective,greatteam,moreglobalalignment,andarealfocusonbrandbuilding,allunderpinnedbyourfundamentalbeliefthatweleverageculturetofuelresults.

Thanks.

Operator :

BrianBittner,Oppenheimer&Company.

BrianBittner (Analyst-Oppenheimer):

Thankyou;thanksalot.IjustwanttoaskaquestiononTacoBell.YoudidrolloutyourprettyaggressivedollarbreakfastmenuinMarchyousaid;soitdidn'treallyimpactthefullfirstquarter.Canyoujusttalkabouthowthisisimpactingtheoverallbusiness?

Isitaccretivetoyoursalestrends?Isitdoingwhatyouexpectedittodo?Andexternally,uslookingatthemargin,howshouldwethinkabouthowthisimpactsthefoodmargingoingforwardortheCOGSmargin?

GregCreed (CEO):

Well,Ithinkthegoodnews,asIsaid,wehad8%transactiongrowthinthatbreakfastdaypartinthefirstquarterbeforewereallygotafullimpactofthedollarmenu.SoIthinkwefeelreallygoodthatthat'sgoingtocontinuetohaveanimpactonourbreakfastbusiness.

Ourfoodandpapercostsforbreakfastareinlineforthebalanceofthebusiness.Sowhetheritgrowsorgrowsfasterorslowerdoesn'treallyimpacttheoverallfoodandpapercosts.

Thegoodnewsis,obviously,TacoBellisbenefitingfromthepriceofbeefrightnow,andthat'sobviouslywhyyou'reseeinginthemarketplacealotofvaluebyboththeburgerchainsandwhyTacoBellcanplayanaggressiveplayinbeefaswell.

Iwouldjustadd,Brian,thatat6%mix,thebreakfastdoesn'tchangetheoverallTacoBellstorymuch.

GregCreed (CEO):

Yes.Ithinkthegoodnewsisit'sgrowing.It'sgrowinginthefaceofusbeingfocused.We'redoingtherightthing,whichwehavegotinnovativeproducts,we'vegotvaluenowinthatcategory,inthatdaypart.AndIfeelreallygood.

IwasoutinrestaurantsintheUSjustrecently.VisitedTacoBellsforbreakfast,gotgreatfood,andhadagreatexperience.Ithinkthegeneralfeelingisthatthisissomethingwe'regoingtoinvestinforthelongterm.

Operator :

AndyBarish,Jefferies.

AndyBarish (Analyst-Jefferies):

Thanks.Yes,justaquickfollow-uponthatandthenoneotherquickone.OntheTacoBellmargin

maintenanceintermsofyourguidancefortheyear,evenwithamoresharpenedvaluefocus,islowercommoditycostreallytheprimaryreasonyoufeelconfidentinthatstill?

GregCreed (CEO):

Well,Ithinktwothings.Idobelievewe'lldeliveratleast3%same-storesalesgrowthforthefullyear.Obviouslywegotofftoaslowerthanexpectedstart;butaswesaidwearerollingoutthebignumbers,plus6%.

ButinthediscussionsI'vehadwithBrianhestillfeelsveryconfident.SoIthinkwe'reconfidentwewilldeliverthesame-storesalesgrowth.We're[winning]intheUSandobviouslycommoditiesarefavorable,andIthinkallsignsarethatcertainlybeefwillstayfavorableprobablythroughthebalanceof2016.

AndyBarish (Analyst-Jefferies):

ThenjustquicklyonemergingmarketsatKFC,IknowyoucalledoutacoupleofPizzaHutmarkets.Thatnumberwasonlyup1%.Isthereanyspecificcountryorareathatwasalittlesofterthisquarter?

GregCreed (CEO):

Look,Ithinkthatwhenyou'rein120--130countries,Ialways--I'mneversurequitesurehowmanycountrieswe'reinonanyoneday--Ithinkthegoodnewsiswehad--in130countriesyou'regoingtohavesomeupmarketsandsomedowns.Indiawasminus1%butRussiawasplus27%insystemsalesforKFC.

Wealsohadstrongdevelopedmarkets.Australiadeliveredanotherreallygoodquarter.Theywereplus5%,which--ifyouthinkaboutwhatthey'vebeenrollingover.

Soweweresoftinanumberofplaces,butthereisalsorealsignsofrealstrengthbothinemerginganddeveloped.IthinkthatRogerEatonandtheteambelievethattheyalsocanobviouslygetsalesupintoatleastthe3%same-storesalesgrowthnumberfortheyear.

Operator :

KarenHolthouse,GoldmanSachs.

KarenHolthouse (Analyst-GoldmanSachs):

Hi;thankyoufortakingthequestion.AquestiononChinathat'sactuallynotoncompsalesbutonnewstoreproductivity.Itlookslikethereisstillagrowinggapbetweencompgrowthandaverageweeklysalesgrowth.Justcuriousifyoucouldcommentonthat.

Isitbeingdrivenbyoneofthetwobrands,unitsinoneareaoranother?Andanysortofupdateonhowtobethinkingaboutuniteconomicsperyear?BecauseIthinkthelastdisclosureswehavereallyonlygothroughlike2014.Thanks.

Okay.Karen,whatwereyouquotingasthereasonwhyyouhadthatfeeling?

Thatifyoulookatoverallstoreproductivitygrowth--sojustsalesperunitversuscompgrowth--itlookslikethegapbetweenthosetwonumbersisstillgettingwider.

Isee.Well,whenwelookatourperformancebypeersit'sprettyconsistent;soIdon'tthinkthere'saparticularfactorthere.Ireallycan'tatthemomentthinkofaparticularreason.Thatcertainlyhasnotstruckme,thatthenewunitsthatwearebuildingareinanyway--haveinferioreconomicsoranysuch.

It'snotasthoughwe'rebuildingnecessarilysmallerunits.Itistruethatwebuiltmorestoresinsmallercities;butourcompsalesgrowthacrosspeershasbeenfairlyconsistent.

WeareexperimentingwithmultiplestoreformatstotakeintoaccountthefactthatthereisstillaveryrapidbuildoutininfrastructureinChina.Sowe'reexpecting--verylargenumberofmallsarealreadyunderconstruction;thehigh-speedrailnetworkisbeingexpanded.AndtheninChina,unliketheUS,thereisnotthephenomenonatthemomentofhighwayswithdrive-throughsorthereststops,andallthosearebeingdeveloped.

Idon'treallyseethecharacterofourproductivityperunitchangingintheyearstocome.Ithinkworldwidethereisatrendtowhatwecallsmallbox,whichisbecausein-linesarebecomingmorepopularinmallstores,etc.Sotheremaybeinthelongertermaslightlysmallerformatunit.

ButChinaisnotthatimpacted,becausewehardlyhaveanydrive-throughshere.Youhardlyhaveanydrive-throughsatall,somostofthemarein-linesanyway.

Maybeweneedtothinkaboutthisquestionalittlemore.Butwedon'tintrinsicallyseeanyreasonwhythesortofgrowthwe'veenjoyedshouldnotbeprojectedlong-termintothefuture.

Allright.Thankyou.

Operator :

JasonWest,CreditSuisse.

JasonWest (Analyst-CreditSuisse):

Yes,thanks,guys;twoquestions.One,ifMicky--I'dlovetohaveyourthoughts,nowthatyou'vebeenoverinChinaforawhile,ontheideaoffranchisingcertainbrandsormarketsorstoresinChina.Justyouroutlookandthoughtsthere.

Thensecondly,Dave,couldyouwalkthroughagainthemathorthereasoningbehindtheVATchange,andhowthatimpactsthebusiness,andwhyyouthinkitwouldbepositive?Itwouldbehelpfuljusttounderstandthatalittlebitbetter.Thanks.

Okay.TheVATquestionIwillleavetoDave.Idon'tknow,Dave,whetheryouwanttotakethatfirstor--?

No,goahead,Micky.I'llgosecond.

Okay.Justremindme;sorry,yourfirstquestionwas?

JasonWest (Analyst-CreditSuisse):

JustyouroutlookforfranchisinginChina.WouldyouliketoconvertmoreCompanystorestofranchise?

Right.Well,atthemomentasyouknowwehavestayedataboutjustover7,000stores.About10%arefranchisedand90%areequity.

Ithinkatthemomentaslongaswehave--andthewayweneverchaseanumberofstoresthatwehavetobuild.Butwhenwegetnewtradezonesopeningandopportunitiesthatmakecommercialsense,andthere'saverydisciplinedprocessforcapitalallocationandmeasuringnew-unitreturns,wehavealotofsurpluscapital,asyouknow,inChina.AllthestoresherehavebeenbuiltwithChinese-generatedcapital.Thereisnointrinsicreasonwhywewouldwanttogivethatuptofranchisees.

Thetworeasonswhywedoexpect,however,franchisingtoupmarginallyis,firstly,thereareregionsofthecountrywhereitmakessenseforfranchiseestooperate.WerecentlyopenedintheautonomousregionofTibetourfirststoreinLhasa,Tibet.Andforavarietyofreasons,includingdifficultoperatingconditionsandlocalmarketknowledge,thatwasgiventoafranchisee.That'sbeensuccessfulandIthinkthatwillgrow.

Sotherearepartsofthecountrywherewewilldoitforreasonsthatitmakessensetodoitthatway.Andtheotheristhattherewillbeopportunitiestodofranchising,forexample,withgasstationchains,etc.Forthosetechnicalreasonsthepercentageoffranchisingmightgoupfrom10%tomaybe15%orsomethingintheforeseeablefuture,butwedon'texpectasignificantchangethere.

Ofcourse,ifwedonotfindtheabilitytoinvestourcapitalinproductiveequityinvestment,surewe'lllookatfranchisingmoreactively.Wearenot--atthemomentweareagnostictowhetherit'sfranchisingorequity,frankly.

Bothhaveadvantages.Franchiseescan--obviouslythey'recapitallight,andalsothey'reveryinnovative.

Butatthemoment,withthecapitalthatwehave,especiallyaswebecomeindependent,Ithinkitwillbeagooduseofthecapitaltocontinuetoinvest.Chinaisagrowthmarketthewayweseeit,andwestillhavethevisionofdoublingortreblingourstorebase.

Sothat'sthewaywe'relookingatit.SoIwouldsaythefranchisingpercentagewilledgeup,butitwillnotbeagamechangerinourbusiness.

Okay.OntheVAT,currentlyChinaispaying5%ofalltheirsalesintheformofabusinesstaxtothegovernment.What'shappeningnowisChinaismovingtoamoretraditionalVATregime,whichissimilartotheregimeinmanyotherpartsoftheworld,wherewewillpay6%ofthosetop-linesalestothegovernment;butwe'llgetacreditforsomeoftheinputsthatwehaveintoourP&Lcommodities,utilities,rent,againstthat6%credit.

What'sdifficultforustosayrightnowisexactlyhowthosecreditsaregoingtoaccumulateandwhatexactlyisgoingtobecreditable.Weareworkingthroughthat.Asyoucanimagine,with6,000storesthisisgoingtobeamonumentaleffort.

Thereisalsosomelackofclarityaroundtherulesatthispoint,still.Sowe'regoingtohavealotmoreforyouinJuly.We'llhaveonemonthworthofthisinourQ2results,thebenefitinourQ2results,andwe'llbeabletoquantifyitinmuchmoredetailatthatpointintime.

Operator :

AndrewCharles,CowenandCompany.

AndrewCharles (Analyst-Cowen):

Great;thankyou.Micky,asyousawsuccesswithanoperationallysimplepromotionatKFCinthefirstquarter,IrealizePizzaHutisnotastime-sensitiveofanoccasion,butthereareopportunitiestoimplementbetteroperationalpracticesofthatbrandparticularlyaroundthebreadthofthemenu?

Yes,absolutely,Andrew.Thereare.

Ithinkthemenuiscomplicated.IthinkImentionedthisinDecemberaswell.

It'satabbedmenu.Youactuallyhave--it'saverylargenumberofpages.It'sabook.

It'salittledifficulttonavigate,sosimplifyingthatisapriority.

PizzaHutiscelebratedandknownforthevarietyofmenuhere,sowedonotwanttolosethat.ButatthesametimeIthinkwecanmakeitfarmorecontrolled.

Italsospeedsupservice.AndtableturnsareanissueatPizzaHutatpeaktimes.Soforthosereasonswe'rerationalizingthemenu.

Wearealso,likeIsaidearlier,pointingoutthegreatvaluethatwehavethroughlunchcombosandotheroffers.Soweareredesigningthatpartofthemenuaswell.

Andlastly,I'mconstantlyamazedathowadvancedChinaisdigitally.It'sgottwicethenumberofcellphones,smartphones,astheUSpopulation.Eveninourofficespeoplegoupanddowntheelevatortogotolunch,they'relookingupwheretheoffersareavailableandwheretheycanbookatable,etc.

Sotheactionisshiftingveryrapidlytomobiledevices,andboththemenuaswellasdigitalmarketingisbecomingverysignificant.Sowe'reworkingonthat.

Thegoodnewsisthatforbothourbrandsweareinaleadershippositionwhenitcomestothatwholedigitalinterface,cashlesspayment,etc.Buttoyourquestion,yes,IthinktheoperationalsimplicityatKFC,makingiteasierforconsumerstochooseourbest-sellingproducts,andthegeneralphilosophythatthemenushouldnotbea--itshouldbeusedmoreasguidingcustomerstoourbest-sellingproductsthantogiveopenchoices,whichtheygetconfusedabout,issomethingthatisapplicableatPizzaHutaswell.

AndrewCharles (Analyst-Cowen):

Thanks.

Amy,wehavetimeforonemorequestion,please.

Operator :

BrettLevy,DeutscheBank.

Brett Levy(Analyst-DeutscheBank):

Goodmorningandthankyou.Canyouguysprovideuswithalittlebitofanupdateonhowyou're

thinkingaboutthere-franchisingeffortsintermsofcadenceacrossthedivisions?Howweshouldbethinkingaboutitoverthenextsixmonthstothreeyearsout.Thankyou.

Sure.Theplanisstilltobe96%franchisedbytheendof2017,whichthatwillincludetheChinaunits,post-spin.Thisyear,moreofwhat'sgoingtogetdonearetheUSre-franchising,whichisgoingtobeKFCsand--I'msorry,TacoBellsandtoalesserdegreePizzaHut.Wewouldexpectsignificantgainsinthoseregards.

Quitefrankly,sellingsomeoftheinternationalmarketsisalittlebitmoredifficult,sothatwilltakealittlebitmoretime.Weexpectthattobemore2017loaded.

GregCreed (CEO):

Okay.Ijustwanttothankeveryoneforbeingonthecall.Obviouslywe'repleasedwe'reofftoastrongstartin2016,thatwe'veraisedfull-yearcoreoperatingprofitguidanceto12%from10%.IalsowanttothankMicky,Larry,andDaveforjoiningSteveandIonthecalltoday.

Sothankyouall,andlookforwardtocatchingupwithyouinthenearfuture.Thankyou.

Operator :

Thisconcludestoday'sconferencecall.

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