Download pdf - YUM Brands (YUM) Earnings Report: Q2 2015 Conference Call ...s.t.st/media/xtranscript/2015/Q3/13219933.pdf · change the business. I have challenged the China team to do all these

CompanyName:YumBrandsIncCompanyTicker:YUMSector:ServicesIndustry:Leisure

EventDescription:Q22015EarningsCallMarketCapasofEventDate:39.40BPriceasofEventDate:89.1

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YUMBrands(YUM)EarningsReport:Q22015ConferenceCallTranscriptThefollowingYUMBrandsconferencecalltookplaceonJuly15,2015,09:15AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

SteveSchmitt;Yum!Brands;VP-IR&CorporateStrategyGregCreed;Yum!Brands;CEOPatGrismer;Yum!Brands;CFO

OtherPart icipants

DavidTarantino;RobertW.Baird;AnalystJohnIvankoe;JPMorgan;AnalystJohnGlass;MorganStanley;AnalystDianeGeissler;CLSALimited;AnalystDavidPalmer;RBCCapitalMarkets;AnalystJosephBuckley;BankofAmerica-MerrillLynch;AnalystBrianBittner;Oppenheimer;AnalystJasonWest;CreditSuisse;AnalystKarenShort;DeutscheBank;AnalystJeffreyBernstein;BarclaysCapital;AnalystSaraSenatore;Bernstein;AnalystKeithSiegner;UBS;AnalystKarenHolthouse;GoldmanSachs;AnalystAndrewCharles;Cowen&Company;AnalystJeffFarmer;WellsFargoSecurities;AnalystR.J.Hottovy;Morningstar;AnalystPaulWestra;StifelNicolaus;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Goodmorning.MynameisJanaandIwillbeyourconferenceoperatortoday.Atthistime,IwouldliketowelcomeeveryonetotheYUM!Brandssecond-quarter2015earningsandconferencecall.

Alllineshavebeenplacedonmutetopreventanybackgroundnoise.Afterthespeakers'remarks,therewillbeaquestion-and-answersession.

(OperatorInstructions).

Thankyou.SteveSchmitt,youmaybeginyourconference.

SteveSchmitt (VP-IR&CorporateStrategy):

ThanksJana.Goodmorningeveryoneandthankyouforjoiningus.OnourcalltodayareGregCreed,ourCEO,andPatGrismer,ourCFO.FollowingremarksfromGregandPat,wewilltakeyourquestions.




Beforewegetstarted,Iwouldliketoremindyouthatthisconferencecallincludesforward-lookingstatements.Forward-lookingstatementsaresubjecttofutureeventsanduncertaintiesthatcouldcauseouractualresultstodiffermateriallyfromthesestatements.Allforward-lookingstatementsshouldbeconsideredinconjunctionwiththecautionarystatementsinourearningsreleaseandtheriskfactorsincludedinourfilingswiththeSEC.

Inaddition,pleaserefertotheinvestorsectionoftheYUM!BrandswebsiteatYUM.comtofinddisclosuresandreconciliationsofnon-GAAPfinancialmeasuresthatmaybeusedontoday'scall.

Wearebroadcastingthisconferencecallviaourwebsite.Thiscallisalsobeingrecordedandwillbeavailableforplayback.Pleasebeadvisedthatifyouaskaquestion,itwillbeincludedinbothourliveconferenceandinanyfutureuseofthisrecording.

Finally,wewouldliketomakeyouawareofthefollowingupcomingYUMinvestorevents.Ourthird-quarterearningswillbereleasedonTuesday,October6.

Andwiththat,I'dliketoturnthecallovertoMr.GregCreed.

GregCreed (CEO):

Thankyou,Steve,andgoodmorningeveryone.Asyousawinourreleaseyesterday,EPSinthesecondquarter,whilebelowprioryear,exceededouroriginalexpectations.Iamencouragedbytheprogresswehavemadeandhaveeveryreasontobelievewewilldeliverastrongsecondhalfandfull-yearEPSofatleast10%.

Overall,Iwouldsummarizeoursecond-quarterperformanceasverysimilartoourfirst-quarterresults.TacoBellisfiringonallcylinders.KFCdeliveredanothersolidquarter.Chinacontinuestoimprove.Andwhilewearemakingprogress,thereisstillmuchworktobedoneatPizzaHut.

Let'sstarttoday'sdiscussionwithChina.Same-storesalescontinuedtoshowsteadybutslowerthanexpectedprogress.Thisquarter's10%declinemarkedanimprovementfromthe12%declinelastquarterdespiteamoredifficultoverlap.Thereisnodoubtinmymindthatwewillmakeafullrecoveryoverthelongtermandreturntohistoricaverageunitvolumes.

WehavethetwostrongestbrandsinChinabyawidemarginbut,frankly,therecoveryistakinglongerthanwewouldlike.Weneedtobemoreaggressive,moreinnovativeandmuchmoredisruptivetostepchangethebusiness.IhavechallengedtheChinateamtodoallthesethingswithasenseofurgencybecauseweknowthat,whenwestepupourperformanceinChina,ourbrandsperform.

Sotobeclear,weare100%committedtonotonlyrecoveringbutgrowingourunitvolumesinChina.Withoverallcustomermetricstrendingup,weknowwecanachievethis.Wearesharpeningourcommunicationsandbringingnewexcitementtoourmenu.We'velearnedfromexperiencethatwemustinnovateourwaytorecovery,andthat'sjustwhatwearegoingtodo.

Tothispoint,inthesecondquarter,welaunchedthefirstoftwomenurevampsatKFC.Thisconsistedofeightnewproductsfocusedonlunchanddinner.InadditiontothetraditionalKFCofferings,thisrevampincludedproductsaimedatconsumersinterestedinhealthieralternativessuchasherbalteaandseafood.

Wealsorecentlylaunchedoursecondmenurevampfocusedonbreakfast.WeknowbreakfastisanunderdevelopeddaypartforusinChina,comprisingabout7%ofsales.Thesetwomenurevampsprovidenewproductsthroughoutthedayandgiveusaone-twopunchofinnovationweknowourcustomerswilllove.




Additionally,wecontinuetorolloutourpremiumcoffee.Asofquarterend,weofferedupcoffeeinover2,000stores,providinganincrementalsaleslistofabout1pointforthestoresofferingcoffee.Thekeytosuccessinthisbusinessistogrowexistingorcreatenewsaleslayerstobuildon.Weareexcitedthatpremiumcoffeeisalreadydrivingsalesandprofitswhilegivingusanotherplatformtogrowfromgoingforward.

We'realsomakingprogresswithdigitalmarketingandouronlinedeliveryplatform.WebelievetheseinitiativesmakeKFCevenmorecontemporary,maintainingahighdegreeofrelevancetotheChineseconsumer.

Inshort,theyKFCbusinesswearebuildingbackwillbebasedonnewproductinnovationandbalancednicelywitheverydayvalueanchors.WearecontinuingdownthepathtomakeKFCevenmoreyouthfulandcontemporary.AllofthisispartofmakingChina'snumberoneforeignbrandevenmorerelevantgoingforwardinanincreasinglycompetitivemarket.

AtpeakofourcasualdininginChina,wecontinuetoexpandunitsatahighpacewithgreatreturns.Same-storesalesdeclined4%inthequarter,butthismarkedanimprovementfromourfirst-quarterperformanceandthebrandispositionedforastrongsecondhalf.Wecontinuetoleveragetheassetthroughoutthedaywiththerolloutofbreakfastandourexpansionintolate-night.

WearealsoexcitedaboutPizzaHutpremiumserviceofferingwherewehavenearly300unitsinChina.Anywayyoulookatit,PizzaHutinChinahasalongrunwayforgrowthahead.

Inconclusion,we'remakingcontinuedprogressinChinaandweremainbullishonourlong-termprospectsthere.Withcashpaybacksofaboutthreeyears,we'reconfidentlyinvestinginnewunitexpansion.Wehaveleadingbrandsinanenviablecompetitivepositionintheworld'sfastest-growingeconomy.Weexpecttoopen700newunitsinChinathisyearandbelievewecansubstantiallyexpandourfootprintovertime.

MovingontoourKFCdivision,Iampleasedtoreportthedivisioncontinuedtoproducesolidresults.Same-storesalesgrew3%andthedivisionopened122newinternationalrestaurantsin39countries.Nearly75%ofthesenewrestaurantswereopenedinemergingmarkets.

IamparticularlypleasedwiththeimpressivegrowthwecontinuetoseeoutofRussia,wheresame-storesalesgrew14%.ItraveledtoRussiainMay,andIhavetotellyouthisisoneofthemostimpressiveteamswehaveanywhereintheworld.Theircombinationofbrandpositioning,operationalexcellenceandproductinnovationgivesmeconfidencethatwewillcontinuetowininthisimportantmarket.

Indevelopedmarkets,theUKandAustraliaonceagainpostedimpressiveresultswithexcellentsame-storesalesgrowth.ThisisevidencethatourKFCbrandcandeliverremarkableresultsinbothemergingaswellasdevelopedmarkets.

Ibelievewecanapplythesamestrategysuchasbreakthroughproductinnovation,compellingvalueandworld-classoperations,whicharepropellingthesebusinessestootherdevelopedmarkets.JustthinkhowourresultswouldbetransformedifwecouldachieveAustralia's2.3millionaverageunitvolumesinallofourmarkets.

NowturningtothePizzaHutdivision,same-storesaleswereeveninthequarterbuttrendsintheUSsalesimprovedacrossthequarter.Wecomplementedourinnovationfocuswithcompellingvalueofferingssuchasanymediumpairsfor$6.99,andthe$12.99BigDipperpizza,whichprovidedmomentum.

Alsocontinuetomakestridesarounddigital--arounddrivingmoredigitalsales.Forexample,ourmeal




replacementdigitalorderswere42%,up10percentagepointsfromthesecondquarterof2014.Aswediscussedlastquarter,weareworkingtoattractnewmillennialcustomerswithourFlavorofNowmenuwhilealsoprovidingourloyalmainstreamcustomerswiththeirfavorites.

IfirmlybelievePizzaHuthasenormouspotentialthatrecentresultsdonotreflect.Weareintentlyworkingtobecomemorecompetitive.Turningaroundtheseresultswillnothappenovernight,butthroughourfocusonvalue,ourassets,digitalandmessaging,wearerelentlesslyworkingonrealizingthefullpotentialofourbrand.WeareencouragedthatPizzaHutInternationalcontinuestodevelopatahighrateandweexpectrecordinternationalexpansionthisyear,layingthegroundworkforfuturegrowth.

Lastbutnotleast,TacoBell.Iamverypleasedwiththeresultsoutofthedivisionthisquarter.Same-storesalesgrew6%,operatingprofitincreased29%,andweopened58newrestaurants.

KeepinmindwelaunchedbreakfastatTacoBellinthesecondquarterof2014,sothisMarksthefirstquarterwearelappingbreakfast.Withbreakfastat7%ofmix,restaurantmarginexceeding20%andaflourishinginnovationpipeline,Iamconfidentthatwewillseecontinuedpositivemomentumgoingforward.

TacoBell'sgoalistobeAmerica'sfavoritemillennialbrandandwearemakingsubstantialstridestodeliveronthataspiration.Forexample,wejustannouncedweareexpandingourdeliverytestingwithDoorDashinselectlocations.I'mdelightedwiththestronginitialtestresults.AndthisisjustanotherexampleofTacoBellprovingitisonthecuttingedgeofQSR.

TacoBellInternationalcontinuedtobuildawarenessandimproveitseconomicmodel.Same-storesalesgrew7%inthequarterwithparticularlystrongperformanceinLatinAmericaandCanada.Wehavenowopened80newrestaurantsthisyear,includingfourwithopenkitchenformats.We'restillinthefirstinningsofinternationalexpansionforTacoBell,butIknowthatthisonedaywillbecomeourthirdglobalbrand.

Soinconclusion,wehavemultipleopportunitiesforgrowthacrosseachYUMdivision.WearemakingcontinuedprogressinChina.TacoBellisgoingfromstrengthtostrength.KFCcontinuestobuildonitsmomentumandPizzaHutisinturnaroundmode.

Icouldnotbemorethrilledtoleadthiscompanyintonextphaseofgrowth.Ourbrandbuildingagendaledbyconsumerinsightsisunderwayanddrivingourbrandandproductpositioning.

AsImentionedlastcall,werecentlyacquiredKaleidaLabtohelpelevatethisagenda.I'mespeciallywithhowKaleidahasintegratingthisthinkingintoeachbrandtoimproveourinside-drivenmarketing.

I'malsopleasedthePizzaHutteamhasaddedexpertiseinbigdataanalytics.Thisisallowingthebrandtosegmentcustomersinwayswe'venotdonebeforethatshouldleadtomoreeffectivemarketinggoingforward.AndintrueYUMfashion,weareplanningtospreadthisknow-howthroughouttheorganization.

Sinceassumingmycurrentrole,Ihavebeenontheroadvisitingmanyofourinternationalmarkets.TosayIlikewhatIhaveseenwouldbeanunderstatement.I'vewalkedawayfromeachvisitgratefulthatIhaveinheritedsuchastrongbusinesswithgreatfranchisepartners,fantasticleaders,andthepotentialforenormousgrowth.

Ofcourse,everywhereIgo,Iseeopportunitiestoimproveourcompany.ButI'mconfidentthatourbrandbuildingfocuscombinedwiththetechnology,innovation,marketing,andoperationeffortsunderwaywillhelpunlockthispotential.

Now,someofyoumaywanttoasktodayaboutourviewsaroundcorporatestructuringrelatedtoour




Chinadivision,includingashareholdersuggestionthatwaswell-publicizedthisquarter.Wedon'tplantodiscussthatanddistractfromoursecond-quarterresults.Butwewantyoutoknowthis.

TheYUMBoardofDirectorsregularlyreviewstrategicoptionstooptimizinglong-termshareholdervalue,includingthoseinvolvingcorporatestructure.Weroutinelydialoguewithshareholders,listentotheirideasandthoroughlyevaluatethosewhichmaybeinourshareholders'bestinterests.

Inanyevent,ourtoppriorityistogetourChinabusinessbackontrackandwearemakingsteadyprogress,asevidencedbyourfirstandsecondquarterresults.Aswehavediscussed,weexpecttohaveastrongsecondhalftheyearbasedoncontinuedprogressinChinaandfullyexpectYUMtodeliveratleast10%EPSgrowthin2015.

Insummary,weareinauniquepositionatYUMwiththreedistinctbrandsthatwewillstrengthenandgrowintothreeiconicglobalbrandsthatpeopletrustandchampion.Weremainfocusedonthethreekeystodrivingshareholdervalue--same-storesalesgrowth,newunitdevelopment,andgeneratinghighreturnsoninvestedcapital.Ibelievethiscombinationofeffortswillenableustoreestablishourtrackrecordofconsistentlydeliveringdouble-digitEPSgrowthin2015andtheyearsahead.

Andwiththat,I'llnowturnthingsovertoPat.

PatGrismer (CFO):

Thankyou,Greg,andgoodmorningeveryone.Today,I'lldiscussoursecond-quarterresultsandshareperspectiveonourfull-yearoutlook.

Forthesecondquarter,asGregmentioned,ourresultswereverysimilartoQ1.Earningspershare,excludingspecialitems,decreased5%.Thiswassubstantiallybetterthanthedeclinewehadoriginallyestimated.Iampleasedwiththequalityofthisupsideasitwasledbybetter-than-expectedrestaurantmarginsatKFCChinaandoutstandingsalesandmarginperformanceatTacoBell.WiththecontinuedprogressweareexpectinginChina,weremainconfidentthatwewillhaveastrongsecondhalfanddeliveratleast10%EPSgrowththisyear.

ReportedEPSdeclined28%inthequarter.Thisincludesa$68millionnon-cashspecialitemchargerelatedtoourdecisiontosellMexicorealestate,negativelyimpactingreportedEPSby$0.13inthequarter.Thisitemreducedourex-specialtaxratebyapproximately2percentagepoints,benefitingex-specialEPSgrowthby3percentagepointsthisquarter.

NowI'dliketoprovidesomecoloronoursecond-quarterresultsbydivision.InChina,operatingprofitdeclined25%priortoforeigncurrencytranslationledbyasame-storesalesdecreaseof10%,whichwassequentiallybetterthanQ1'sperformancedespiteamorechallenginglap.

Restaurantmarginswere14.6%inaseasonallylowquarter.Thiswas2.2percentagepointslowerthanlastyear'sQ2,yetitwasasignificantimprovementfromthe4.5percentagepointdeclinewesawinthefirstquarter,demonstratingcontinuedprogress.Themargindeclineresultedfromtransactiondeleverageandinflation,partiallyoffsetbypricingandlaborproductivity.

OurteaminChinacontinuedtodoanoutstandingjobofdrivingrestaurantoperatingefficiencythroughimprovedstorelevelsalesforecastingandbetterlaborscheduling.Importantly,theyaccomplishedthiswhilemaintainingourhighstandardsofcustomerservice.ThiscontinuestobolsterourbeliefthatChinadivisionrestaurantmarginswillreturntothe20%rangeassalesrecoverandthatthisrecoveryhasthepotentialtounlockapproximately$600millionofoperatingprofitfromourexistingstorebasealone.

Inadditiontotheprofitleveragewewillrealizeassalesrecover,wecontinuetoopennewunitswithconfidence,whichisakeydriveroffuturegrowth.Weopened80newrestaurantsinthesecondquarter,




bringingourfirst-halftotalto251newunitsinChina.Wecontinuetoshiftournewunitdevelopmenttowardhigherreturninvestmentsaswearemoreselectiveintier1andtier2citiesandcontinuetoupweightdevelopmentintier3throughtier6cities.

Similarly,wecontinuetoshiftmoreofournewunitdevelopmenttoPizzaHutcasualdining,whichgeneratesourstrongestreturnsinChina.Basedontheresultsweareseeinginthesenewrestaurants,weareconfidentthattheseinvestmentswillyieldstrongreturnsandweremainontargettoopen700newrestaurantsthisyear.

NowmovingtoourKFCglobaldivision,whichpostedanothersolidquarterwithgrowthinsales,marginandprofit.Systemsalesgrowthwasespeciallystronginemergingmarkets,up12%beforeforeignexchange,ledbyRussia,AfricaandCentralandEasternEurope.Internationaldevelopedmarketsalsodeliveredsolidsystemssalesgrowth,up5%beforeforeignexchange,ledbyAustralia,UKandWesternEurope.AndKFCintheUSdelivereditsfourthconsecutivequarterofsolidsame-storesalesgrowthwithcompsup3%.

Divisionoperatingmarginincreased1.3percentagepointsinthequarterto21.9%,drivenbysame-storesalesgrowth,franchise-lednewunitdevelopment,andstrongerrestaurantlevelmarginsacrosstheboard.AndwhileincreasedadvertisingexpenserelatedtoourongoingUSturnaroundprogramimpactedthedivision'sprofitby2percentagepointsinthequarter,KFCGlobal'soperatingprofitstillgrew10%excludingtheimpactofforeignexchange.Animportantelementofthisisrobustfranchise-ledinternationaldevelopmentasKFCopened122newinternationalrestaurantsinthequarter,andisonpacetosetanewrecordthisyear,opening700newinternationalrestaurantsoutsideofChinaandIndia,includingarecentnewmarketopeninginMyanmar,demonstratingthestrengthandbroadappealofthisiconicglobalbrand.

Same-storesaleswereevenforourPizzaHutglobaldivisionwithgrowthof2%inemergingmarketsand1%intheUSandadeclineof2%ininternationaldevelopedmarkets.Divisionoperatingmargindecreased90basispointsto22.6%asstrategicgrowthininvestmentsininternationalG&Aoffsetimprovedrestaurantmargins,whichbenefitedfromlowercheesecosts.

Whilesaleswereevenwithlastyearandshortofexpectations,weareconfidentwearemakingtherightinvestmentstoimprovePizzaHut'soverallbrandposition,operations,anddigitalexperienceglobally.

NewunitdevelopmentcontinuestobeabrightspotforPizzaHutasthedivisionopened101newrestaurantsinthesecondquarter,including66newinternationalrestaurants.Franchiseesopened92%ofthesenewinternationalunits,underscoringtheirconfidenceinthebrand.Weareconfidentwewillhaveanotheryearofrecorddevelopmentwithabout550newinternationalrestaurantsin2015.

Andfinally,TacoBellpostedanotherexceptionallystrongquarterwithsame-storesalesgrowthof6%andrestaurantmarginof23%,whichismorethan5pointsbetterthanQ2oflastyear.Asaresult,operatingmarginincreased4.7percentagepointsto29.5%,liftingoperatingprofitby29%versusprioryear.

WecouldnotbemorepleasedwiththeperformanceofourTacoBellteamandtheircontinuedfocusoncategoryleadinginnovationacrosseveryaspectoftheirbusiness.Thisobviouslyincludesournewbreakfastlayer,whichincreasedtoaveryhealthy7%salesmix.

Additionally,weopened58newrestaurantsinthesecondquarterwithnearly90%openedbyfranchiseesandarewellonourwaytoopeningatleast150netnewrestaurantsthisyearwithinternationaldevelopmentacceleratingintheyearstocome.Anywayyoulookatit,TacoBellisapowerhousebrandwithoutstandingmomentum.




NowI'dliketoshiftgearsandtalkaboutourfull-yearoutlook.WefullyexpecttodeliverEPSgrowthofatleast10%thisyear.Givenourfirst-halfEPSdeclineof7%,wewillneednearly30%EPSgrowthinthesecondhalfoftheyeartoreachthistarget.Webelievethisisachievable.

ThekeytothisEPSbouncebackisasalesrecoveryinChina,andweareconfidentwewilldeliversolidlypositivesalesnumbersgoingforward,especiallyaswelapthesupplierincidentfromJuly20oflastyear.Iamextremelyconfidentthat,assalesreturn,profitswillflowthroughnicely,giventhecontinuouscostmanagementinitiativeswe'veseenthroughourfirsthalf.Withfirst-halfChinarestaurantmarginalreadyover16%,wenowexpectfull-yearrestaurantmargintobecloserto17%.Asareminder,60%ofChina'soperatingprofithistoricallyisearnedinthesecondhalfoftheirfiscalyear,whichincludessevenof12months.

OutsideofChina,weexpectKFCtohaveanothersolidyearandPizzaHuttofallwellshortofitsongoinggrowthtargetdespitetheimprovingresultsweexpectbalanceofyear.ForTacoBell,althoughweexpectsolidperformancebalanceofyear,weexpectmuchmoremoderateprofitgrowthasweoverlapstrongersalesandmarginperformancefromlastyear.

Idowanttopointoutforeigncurrencytranslationremainsastrongheadwindaswecontinuetoexpectthistoimpactfull-yearEPSbyabout5percentagepoints.However,thisimpactisincludedinourEPSforecastofatleast10%growth.Tobeclear,thisexposureisoneofprofittranslationanddoesnotimpactourabilitytopriceourproductscompetitivelyaroundtheworld.

So,ifyoustepbackandthinkabouthow2015isdeveloping,it'sveryconsistentwithourexpectationcomingintotheyear,whichisanegativefirsthalffollowedbyaverystrongsecondhalf,drivenbyChina.Andimportantly,wecontinuetoinvestbehindthebusiness,opening2,100newinternationalrestaurantsin2015.OutsideofChina,approximately90%ofournewunitswillbeopenedbyourfranchisepartners.

Soletmewrapthingsup.Wearepleasedthatoursecond-quarterresultswerestrongerthanexpectedduetorobustperformanceatTacoBellaswellasthecontinuedrecoveryinChina.Weexpectatleast10%EPSgrowththisyearwithaverystrongsecondhalf.

Andwiththat,I'llopenitupthelinetoQ&A.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions).

DavidTarantino,RWBaird.

DavidT arantino (Analyst-RobertW.Baird):

Hi,goodmorning.MyquestionisontheChinasalesrecovery.AndIguessthefirstpartishowwouldyouframeupyourcurrentexpectationforcompsfortheyearnow?Ithinklastquarteryouwerepointingtowardsthelowendofyour3%to7%guidance.SoIjustwantedtounderstandwhereyouarethinkingnow.

Andthenspecifically,youmentionedthattherecoveryisgoingIguessslowerthanexpected.Socouldyoutalkaboutmaybewhyyouthinkthat'sthecaseandwhetheryouthinkit'smacro-relatedormorespecifictothebrandmetricsthatyouareseeing.

PatGrismer (CFO):

ThisisPat.I'lltakethefirstpartofyourquestionandGregwillresponsetothesecondpart.




Soastoourexpectationsforfull-yearsame-storesalesgrowthinChina,atthisstageoftheyear,itstillremainsdifficulttocall.Wewillcertainlykeepyouupdatedastheyearprogresses,butcertainlybasedoneverythingwe'veseentodateandourforecastbalancefortheyear,full-yearsame-storesalesgrowthinChinacouldbeinthelowsingledigits.

WedoexpectbothKFCandPizzaHutsame-storesalesgrowthtoturnstronglypositiveaswelaptheinitialimpactoftheOSIpublicitylaterthismonth.ThiswillfuelastrongsecondhalfforChinaandenableustodeliverEPSgrowthofatleast10%fortheyear.

Iwouldalsopointoutthat,fromaprofitperspective,stronger-than-expectedmarginperformancehasoffsettheimpactofalower-than-expectedsalesrecoveryinChina,andweexpectthiswillcontinuebalanceofyear,therebypreservingouroverallprofitoutlook.

GregCreed (CEO):

Letmeanswerthesecondpartofthatquestion.Ithinkthegoodnewsisthatsalesarerecovering.Wewentfromminus12%tominus10%despiteamoredifficultlapofplus15%.Thegoodnewsisthattheconsumermetricsareimproving,trendingintherightdirection.

Asalways,theseareneverlinear,unfortunately,butwedoknowthatwhenwecomparethistopreviousrecoverieswe'regoingintherightdirection,makingprogressacrosstheboard.SoIfeelgoodandweremainobviouslybullishonChina.

WecontinuetoinvestinChina.AndIthinkasyouknow,thesecustomermetricsaretheharbingeroffuturesalesperformance.SoIthink,withallthatsaid,weremainverybullishandconfidentandcontinuetoinvest.

Operator :

JohnIvankoe,JPMorgan.

JohnIvankoe (Analyst-JPMorgan):

Thankyouverymuch.Afollow-uponthatandmaybeanadditionaswell.CouldyoudiagnosewhyspecificallyyouthinkChinawasbelowyourownexpectationsinthesecondquarter,especiallygiventhecustomermetricswhichhavebeentrendingupthroughouttheyear?

Andsecondly,itisclearthatwithitbeingalittlebitbelowyourexpectationsandperhapsatweakdowninthecompsinChinafor2015,itisinterestingtojuxtaposethatwiththeChinamarginnumbersgoingup.Sojustaphilosophicalquestioniswhynotreinvestsomeofthatmargintoregainthetraffic?Orinotherwords,howconfidentareyouthatthefocusonmarginisnotareasoninandofitselfwhycompsmightbeslightlybelowexpectations?

GregCreed (CEO):

Ithinktheslower-than-expectedrecovery--rememberwe'vehadtosafetyissueswhichwe'veneverhadbefore.Wehaveneverbeenonthemodeltwosafetyissues,andthere'sobviouslysomeslownessinrecoveringthat.

Buttherehasbeennoimpactonourcustomermetricsaswemeasurefromanoperatingpointofview,andsoIthink,inthatsense,wearegoingtocontinuetopushaggressively.Weneedtobemoreinnovative.AndthewayIlookatitiswithwherewearetoday,Pathasgivenyoutherightguidance,butwe'vestillgotsixmonthsoftheyeartogo.

Andrightnow,whatIamtryingtodoisaggressivelybringoutsideideasfromYUMintoChina.Aswesaid




earlier,we'vegotreallyanumberofourKFCbusinessesonfire,whetherthat'sRussia,theUK,Australia,orSouthAfrica,andIthinkthere'sanumberofproductinnovations,there'sanumberofvalueplaysthatthosemarketshaveplayed.

AndI'mveryconfidentthatwecanbringthosetobear.Andthatsaid,IstillexpectastrongsecondhalfinChina.Saleswillgopositive,wewillcontinuetomakeprogressandIthinkwecanbringthepowerofYUMtobearbytakingtheseideasfromthosepowerhousecountriesandhaveChinatestthose.

PatGrismer (CFO):

ThisisPat.I'lljustaddacoupleofothercommentswhichisthatwefeelverygoodabouttheproductivitygaintheteamhasmadeinChina.Webelievethattheyaresustainable,asGregmentioned.Theyhavenotimpactedcustomerservicelevels.

Andfranklywhatthey'veeffectivelydoneisstrengthenunderlyingunitleveleconomicswhichnotonlygivesuscontinuedconfidencetoinvestattheratethatwearebehindnewunitdevelopmentbutalsoreinforcesourbeliefthat,assalesrecover,thatwewillseesignificantprofitleverageinthebusiness.

GregCreed (CEO):

IfIwastomakeonelastcomment,Iwouldsayweneedtobalancevaluewithinnovation.There'snodoubtinnovatingourwayoutofthisisthebestwaytodoit,andthat'swhatwe'regoingtostayfocusedon.

Operator :

JohnGlass,MorganStanley.

JohnGlass (Analyst-MorganStanley):

Thanks.Goodmorning.First,onChinacomps,hastherecentdeclineintheChinesestockmarkethadanyimpactonsales?Doyounoticeacorrelationthereatall?

PatGrismer (CFO):

Wedon't.ThisisPat.Wedon'tseeacorrelation.Wethinkactuallyaverysmallpercentageofcustomershavebeenimpactedbythat.Astowhetherornotithasimpactedbroaderconsumerconfidence,wehavenoreasontobelieveatthisstagethatthatisthecase.

JohnGlass (Analyst-MorganStanley):

Greg,ifIcouldaskonemore.YoudidopenupthatyoutalkedaboutthepossibilityofthisChinaspinnotion.Iknowyoudon'twantittobeadistraction.DoyouviewthatasadistractioninandofitselffortherecoveryofChinasothatyoumightwanttowaituntilChinarecoversbeforeentertainingthatidea?

GregCreed (CEO):

Ithink,asIsaidinmypreparedremarks,wedon'twanttotalkaboutit.Obviously,wereviewourshareholderproposals.ButIcanassureyoutheChinateamisfocusedononething.TheirnumberonepriorityandmynumberonepriorityisgettingChinasalesbackintosortofstrongergrowth.

Operator :

DianeGeissler,CLSA.

DianeGeissler (Analyst-CLSALimited):




Goodmorning.Isitsafetoassumethatyoukeptyourguidanceforthefullyearatatleast10%EPSgrowthbecauseoftheuncertaintyaroundtheChinacomp?Isthatthebiggestholdbackdespitethefactthatthemarginissomuchbetterthanyouexpected?AndthenIalso--maybeI'llletyouanswerthatfirst.

PatGrismer (CFO):

ThisisPat.Happytorespondtothatquestion.Ithinkwhatyouareimplyingisthatmaybethefull-yearguidanceisconservative.AndIwouldsayabsolutelynot.AndIdowanttoputitinperspectivebecauseyouhavetobearinmindthatwearethemidpointofouryear.

EPSisdown7%andasIsaidinmypreparedremarksearlier,toachievefull-yeargrowthofatleast10%,EPSneedstogrownearly30%inthesecondhalfoftheyear.AndIdon'tthinkofthatasanoverlyconservativenumber.

Obviously,it'sheavilydependentontheresultsofourChinadivisionwhereprofitsweredownabout30%inthefirsthalfoftheyear.AndinorderforChinatodeliveronitsexpectedshareofsecond-halfEPSgrowth,second-halfprofitsthereneedtobemorethandoublewhattheywerelastyear.

ButweareconfidentChinacandeliverthisresult,butwith60%oftheirprofitsbeinggeneratedinthesecondhalf,Idon'tthinkit'sprudenttoadoptamoreaggressivestanceandleaninonthis.

Additionally,asImentioned,foreign-exchangeheadwindsaremuchstrongerthanwehadoriginallyestimated,butthisisfactoredintoouroverallEPSguidance.SoIjustwanttomakeveryclearweexpecttohaveastrongsecondhalfbasedonthecontinuedprogressinChinaandwefullyexpecttodeliveratleast10%EPSgrowthfortheyear.

DianeGeissler (Analyst-CLSALimited):

Okay,thankyou.AndthenIwantedtoaskonthecommentsaboutthenewunitmixleaningmoreheavilyonlowertiercitiesandalsointothePizzaHutfranchiseandhomedelivery.

CanyoutalkalittlebitaboutyourdevelopmentexpectationsforthisyearandevenintonextyearintermsofwhatweshouldbethinkingaboutKFCversusPizzaHutorversusPizzaHuthomedeliveryandthenhighertiercitiesversuslowertiercities?Justtryingtoframethatup.

PatGrismer (CFO):

Certainly.AsImentioned,ourcapitalinvestmentfollowsreturns.Sowherewegeneratethehigherreturnsiswherewearedirectingmoreofourcapitalspending.Thathasbeenthecaseforthelastfewyears.

Andjusttoputitinperspective,forthequarter,60%or62%ofKFCnewunitopeningswereintier3andbelowcities.Backin2012,thatnumberwas53%.Soyou'veseenaprettysignificantshiftthere.

AndthenasitrelatestoPizzaHutcasualdiningforthequarter,thatbusinessaccountedfor35%oftotaldivisionnewunitopenings.In2012,thatnumberwas24%.Youcanexpectthosetrendswillcontinuebecause,again,that'swhereweseethestrongerreturnsandourcapitalinvestmentwillfollowthereturns.

I'mnotgoingtogivepreliminaryguidancefor2016asitrelatestoeithernumberofunitsorthemixofunits,butIwilltellyouthatwewillcontinuetodirectmoreofourcapitalinvestmentmoneytowardthehigherreturnopportunities,whichatthemomentarewithPizzaHutcasualdiningandfortheKFCbusinessinthelowertiercities.




Operator :

DavidPalmer,RBCCapitalMarkets.

DavidPalmer (Analyst-RBCCapitalMarkets):

Thanks.CouldwetalkalittlebitaboutthemarketingandmenunewsfromChina?Inparticular,howdothinkthatnewmenuisperformingatKFCChina?Andanydatapointswouldbehelpfulwiththeimpacttoyourmarketing,evenaswelookinto3Q.Thanks.

GregCreed (CEO):

Ithink,aswesaid,obviouslywesawsequentialimprovementfromminus12%tominus10%.Thenewmenuitemsareaccountingforabout15%ofsales,sotheycertainlyhavegottractionwiththecustomers.Ithinkthat'salsoanothergooddatapoint.AndIthinktheconsumermetricscontinuetoshowimprovement.

SoIthink,ifyoulookatourcontinuousimprovement,youlookatthepercentageofmixfromthesenewitemsandyoulookatthecontinuedimprovementinourconsumermetrics.AndIthinkthatallbodeswell,asPathassaid,thatwewillhaveastrongsecondhalf,wewillgointopositivesame-storesalesgrowth.AndIthinkIremaincompletelyconfident.

Now,canwetakeideasfromaroundtheworldbetweennowandtheendoftheyearandtestthose?Yes.DoIstillhaveasenseofurgency?Yes.Couldwedothingsmorespeedy?Yes.Soasyouprobablyexpect,that'soccurring.That'swhyweareatthehalf-yearmarkandthere'sstillplentyoftimeforustostillevolveandtinkerwiththecalendarbetweennowandtheendoftheyear.


Isthereanythingspecificthatyoulearnedthatyouthinkwarrantstweakingthatyoucouldcalloutfromfirsthalf,thingsthatworkedanddidn'twork?

GregCreed (CEO):

TheotherwayIlookatit,therearesomegreatproductsoutsideofChinathataredoingverywellwhetherit'stheUK,Australia,SouthAfricaorRussia.SowhatIhavedoneisIhaveputtheChinateamobviouslyindirectcontactwiththosebusinesses.AndIknowthatanumberofthoseideasarecurrentlybeingconcepttestedinChinaaswespeak.

Soit'sbeenmorethatI'veseensomereallypowerfulideasoutsideofChinathatIthinkhaverelevanceinChina,andthenIreallyaskedtheChinateamtoconcepttestthose.Andifnecessary,wewillmakechangestothecalendarinthebackhalfoftheyear.


Thankyou.

Operator :

JosephBuckley,BankofAmerica.

JosephBuckley(Analyst-BankofAmerica-MerrillLynch):

Thankyou.AcoupleofquestionsonChinaaswell.Doyouthinkthattheslower-than-expectedsalestrendisstillrelatedtotheShanghaiHusiincident,ordoyouthinkit'srelatedtobroaderthingshappeninginChina,whethercompetitivelyorjustsomewhatslowergrowth?




PatGrismer (CFO):

ThisisPat.Ithinkitisfairtosaythatwhatthebrandorthebrandsarerecoveringfromistheincidentfromlastyear,becausethat'swhathadthedramaticimpacttosalestartinginthemiddleoflastyear.Andwearecontinuingtorecoverfromthat.

Ithinkit'salsofairtosay,aswehavesaidonpreviouscallsandatourinvestorconference,thattheenvironmentinChinahaschangedintermsofbecomingmorecompetitive,andsoconsumersdohavemorechoice.Thathasraisedthebaronustoinnovatemorethanwehaveinthepast,tokeeppacewithachangingChineseconsumer,andtocontinuetomoveevenmoreaggressivelyonthingslikedigital.SoIthinkitisfairtosaythattheenvironmenthaschanged,butthatwearechanginginresponsetothat.

GregCreed (CEO):

IfIcanbuildonthat,Joe,wehavemarketsthataremuchmorecompetitiveinChinathatwecompeteinandwecompeteverysuccessfullyin.Again,wecanuseYUMnow,haveasharewherewe'vebeenverysuccessfulinmarketsthathaveevenprobablytwoorthreetimestheamountofcompetition.WecanbringthatknowhowtobeartohelptheChinateamastheyobviouslymovetomorerapidlyimprovethesellerperformance.

JosephBuckley(Analyst-BankofAmerica-MerrillLynch):

DoyouhaveasenseofwhattheChineserestaurantmarketasawholeisdoing?Hasthatslowedsignificantlyalso?

GregCreed (CEO):

Idon't.That's--no,Idon't.

PatGrismer (CFO):

Ithinkgenerallytheeconomyisgrowingataslowerpace,soit'sfairtosaythatandthatthatisputtingpressureonretailgenerally.ButIthinkwealsoneedtobearinmindthatwithGDPgrowingthisyearataround7%,itremainsthefastest-growinglargeeconomyintheworld.

Operator :

BrianBittner,Oppenheimer.

BrianBittner (Analyst-Oppenheimer):

Thanksverymuch.MyquestionisIthinkI'mjustalittleconfusedonwhythere'skindofatonechangeinthewayyou'retalkingabouthowsalesaretrackingversusyourexpectations,justbecausetheguidanceforthesecondquarterwasforsequentialimprovement.Youdidthat.

Wehaven'tevenstartedlappingtheJuly20falloffinthebusinessyet.Thatcomesinaweek.Istheresomethingthat'shappened,sayinJunesincethequarterend,that'scausingthetonechangeorwereyourexpectations(technicaldifficulty)significantsequentialimprovementrelativetowhatoccurred?

PatGrismer (CFO):

ThisisPat.Nothingspecificthathaschangedtodrivethat.Justaswestepbackandwelookattheperformanceinthefirsthalfoftheyear,it'sfairtosaythatsame-storesales,whilerecovering,haven'tbeenrecoveringatthepacethatwehadoriginallyanticipated.




Thankfully,weareseeingthatoffsetthroughimprovedproductivityinthestoresandthosemargingainsarethereforemutingtheprofitimpactofaslower-than-expectedsalesrecovery.

Butmakenomistake.Thesalesrecoveryishappeningnotonlybasedonwhatweseeintermsofsame-storesalesandthefactthatinthesecondquarterwelappedahardercomp,sowegotsequentialimprovementontopoflappingahardercomp,butalsobasedonwhatweseeinourkeyconsumermetrics,which,asGregmentioned,arealeadingindicatorofwheresaleswillgo.

Butwefeltthatitwasimportanttoacknowledgethatsalesareprogressingataslower-than-expectedpace,andthatisfactoredintoourfull-yearEPSguidanceofatleast10%.

GregCreed (CEO):

IthinkIwanttomakesureeveryoneunderstandswestillexpectaverystrongsecondhalfandthatwewilldeliveratleast10%forthefullyear.

BrianBittner (Analyst-Oppenheimer):

Andyoualsomentioned--amIstillherewithyouguys?Youalsomentionedthatsame-storesalesinChinacouldbelowsinglesfortheyear,whichwouldstillimplydouble-digitcompsinthesecondhalf.Istheconfidencebehindthatjustthewaythecoretrendacceleratedfromthefirstorsecondquarter,likeonatwo-andthree-yearbasis?

Isthatwhatultimatelygivesyouthemostconfidenceindouble-digitone-yearcompsinthesecondhalf?

PatGrismer (CFO):

Youarerightthatwedoexpectaverystrongsame-storesalesgrowthinthesecondhalf,particularlyaswelaplastyear'sOSIincident.Andtherearemultipleindicatorsthatsubstantiatethisview,one-year,two-year,three-year,four-yearcompsforKFC.Welookatabsolutetransactionvolumesonade-seasonalizedbasis.

Welookatkeyconsumermetrics,which,again,areallmovingintherightdirection.Soallofthattogethergivingusconfidencethatwe'llgetthesecond-halfbouncebacknecessarytoachievetheprofitgrowthobjectivesinChina,whichunderpinatleast10%EPSgrowthfortheyear.

Operator :

JasonWest,CreditSuisse.

JasonWest (Analyst-CreditSuisse):

Yes,thanksguys.I'mnotsurehowmuchyouarewillingtotalkaboutotherstructuralideas,buttheideaofrecapitalizingthebalancesheethascomeup,particularlygiventhesubstantialfranchiseassetsyouguyshave.I'mjustwonderingifyoucouldgiveyourupdatedthoughtsonthat,particularlyasyoumovetowardssortofthe95%franchisemixoutsideofChina.Doesthatstarttochangeyourthinkingaroundthecapitalstructure?Andthenalsolookingatwhat'shappenedacrosssomeofyourfranchisepeers.Thanks.

PatGrismer (CFO):

ThisisPat.Nochangetoourpolicy,whichistooptimizeourcapitalstructurebasedonwhatwebelieveisinthebestinterestofshareholders,whichistomaintainthatlowinvestment-gradecreditrating.Andsoourpolicyhasn'tchanged.Andnospecificguidanceastowhatthatcapitalstructuremightlooklikewhenwecompletethethree-yearre-franchisingprogramweannouncedinDecember.




JasonWest (Analyst-CreditSuisse):

Okay.Butevenasamorefranchisedbusiness,youwouldstillliketokeepthatininvestmentgrade?

PatGrismer (CFO):

Welookatourcapitalstructurefromanenterpriseperspective.Wedon'tsegmentourbalancesheetaccordingtoonepartofthebusinessversusanother.Sowehavetobearinmind,inourChinabusiness,wehaveasubstantialequitypresencewithalloftheoperatingleaseswhichfunctionasvirtualdebt,ifyouwill,whichplaysintohowweoptimizeouroverallcapitalstructureforourshareholders.

Operator :

KarenShort,DeutscheBank.

KarenShort (Analyst-DeutscheBank):

JustacoupleofquestionsonPizzaHut.SoIguessyouhavetakensomeaggressivestanceswithyourvaluepositioningmorerecently,butIguessitdoesn'tseemtoberesonatingwiththecustomer.Ormaybeaskedanotherway,doyouthinkit'savalueissue,atrialissue,afrequencyissueoranythingelse?Becauseobviouslyyourpeersaregenerallydoingextremelywell.

GregCreed (CEO):

Thankyouforaskinganon-Chinaquestion.Inallseriousness,yes,ourpeersareclearlyoutperformingus.Ithinkthere'snoonesilverbullettothesolution.Yousawusinthequarterplayinginmorestrongervalue,whichactuallyoverthequarterdidshowimprovementacrossthequarter'sperformance.AndIexpectthattocontinuegoingintothesecondhalftheyear.

Butthisisasortoftotalre-lookwhichiswehavetobe--wehavetohave--assetshavetobeupgraded,wehavetohaveacompellingvalue.Wehavetohavecompellinginnovation.Wehavetodeliverasuperiorexperience.WehavetoimproveoureCommercedigitalexperience.Sothere'salotofworkthat'sgottogetdone.I'mveryconfidentintheteamthat'sinplacetomakethathappen.

We'vebroughtsomenewpeopleontotheteaminPizzaHut,sowehaveinvestedinareaslikedigitalmarketing,foodinnovation,eCommerce.Aswesaidonthecall,we'reactuallyaregettingintobigdataanalyticsandwearereallystartingtoseesomeearlysignsofIthinkthatwillhelpuspositionthebrandbetterandactuallyreallyunderstandwherethebusinesshasgoneto.

Soit'sholistic.We'reonit.We'vebroughtpeopleintoit.I'mverycomfortableandhappywiththeleadershipthatwe'vegotinplacetodeliveronit.Wearenothappywiththeprogress,butwearemakingprogressandIthinkyou'llseeuscontinuetomakemoreprogressastheyearunfolds.

Operator :

JeffreyBernstein,Barclays.

Jef f reyBernstein (Analyst-BarclaysCapital):

Great.Thankyouverymuch.Justunfortunately,IwantedtohitbackonChinaforasecond.Twothings,onejustonthecomp.I'mwondering,asyoulookatitperhapsslightlybelowexpectation,whetheryouseeitmaybeasperformancebymarketordaypartorweekend,weekday.I'mjustwondering.Asyouslicethedown10%whichwecan'tdo,isthereanyparticularareaofconcern?

Andmyotherquestionwasjustbroadlyonthepositioningofthebrand.Ithink,mostrecently,youkindof




werefocusedalittlebitmoreonpremiumwithpromotionsandwhatnot.I'mjustwonderingwhethertherecentchallengeleadyoutoonceagainmaybebroadenthatout,focusalittlebitmoreonvaluetoretainthatlowerincomeconsumer.Thanks.

PatGrismer (CFO):

ThisisPat.I'llrespondtoyourfirstquestionandGregwilltacklethesecond.First,withrespecttowhatweareseeinginthecompsandwhetherwhenyoulookatvariouswaysofsegmentingitweareseeingmaterialdifferences,theonlythingIwouldhighlightisthatweareseeingstrongerperformanceinourTier1citiesatbothbrands.ItseemsthattheTier1consumersarelessfazedbythesupplierpublicitythistimearound.

AndIwouldsaythat'sespeciallyencouragingbecausethat'swherewehaveahigherconcentrationofstores,andalsofacethestrongestcompetition.So,Ithinkthat'sfurtherevidenceofourbrand'songoingrecoveryandresilience.

Therearesomeregionaleconomiesthataremoredependentonindustrialproductionandtheyarefeelingmorepressurefromslowereconomicgrowthandweareseeingtheeffectsofthatinweakersalesperformanceinthoseregions,particularlyinsomelowertiercities.

Andinresponsetothat,KFChasrecentlylaunchedregionalpromotionswith10RandBBurgertohelpstimulatetraffic.Butthat'stheonlythingthatreallybearsmentioningintermsofanyvariationsincompsacrosstheentiremarket.

GregCreed (CEO):

Justtotalkaboutthepositioning,Ithink,yes,weprobablyhavetofindabetterbalancebetweeninnovationandvalue.

Again,ifIgobacktotheKFCmarketsthatarereallyoutperforming,whetherit'sasIsaidRussia,Australia,SouthAfrica,theUK,whatyouwillseeinthosemarketsiswehavegreatentrypricepoints,wehavegreatvalueformoney,wehavereallychicken-focusedinnovation,andwearereallydoingdisruptivethingsinthemarketplace.

So,Ithink--andthenwehave--Iguessitalsogoeswithoutsayingwehavegreatleadersrunningthosebusinessesaswell.Ithinkthatwearegoingtohavetofindmorebalance,butI'mveryconfidentthatwecanfindthatbalanceandI'mveryconfidentthatwehavegottheideaandtheresourcesaroundYUMinordertoaccomplishthat.

Operator :

SaraSenatore,Bernstein.

SaraSenatore (Analyst-Bernstein):

Thankyou.Ihavetwofollow-upquestions.OneisaboutPizzaHutandone,nottobelaborthepoint,alsoaboutChina.SoonPizzaHut,couldyoujusttalkaboutthedevelopedmarketsoutsidetheUS,andinparticulardiagnosemaybe?Aretheissuesthesameoutthere?Andisitstepped-upcompetition,digital,value,marketing?JustsoIkindofunderstandbecauseitfeelslikebroadlythebrandsortofsteppedbackalittlebitinthelastcoupleofquarters.

Andthenthefollow-uponChinaisreallyoneabouttiming.AndIguessyoulaidoutsortof$600millioninEBITDA,whichisabignumber,butit'slessimpressiveifittakesfiveyearstomaterialize.Andsodoyouhaveinternallyasenseofatwhatpointyoudecide,okay,thisbusinessmaynotgobacktopeak




volumes?Andlikewisehowlongdoyoudecide,whenyou'relookingatstrategicalternatives,howlongdoyougiveyourselvestomakedecisions?I'mjusttryingtoframetimingfrombothfundamentalandstrategicstandpoints.

GregCreed (CEO):

Letmeanswerthefirstpartofthequestion.IthinkwithourPizzaHutbusiness,astrongUShelpsastrongglobalbusiness.There'snodoubtaboutthat.So,havingsaidthat,Ithink,outsideoftheUnitedStates,ourassetsareinmuchbettershapethantheyareintheUnitedStates.

ButIdothinkintermsofthingslikevalue,eCommerceanddigital,weneedtoaccelerateourprogressinthoseareas.So,Ithinkourassetsareingreatshape.Ithinkourfoodqualityisingreatshape.Ithinkthefoodinnovationisingreatshape,butthere'snodoubtthatIthinkvalueaswellasthewholecustomerexperienceineCommerceareareasthatweneedtomakesureweremaincompetitiveinasleadersinthoseplaces.

PatGrismer (CFO):

ThisisPat.I'llrespondtoyoursecondquestionastothetimingaroundrecoveringthe$600millioninEBITDA.Wehaveneverbeenspecificastoatimeframeforthat.WhatIwanttoletyouknow,however,isweareabsolutelyconfidentthatthebusinesswillreturntothose2012peakaverageunitvolumes.Andweareabsolutelyconfident,basedontheprogresstheteamhasmadetoimproveunitleveleconomicsthat,asthesalesrecover,therewillbesignificantprofitflow-throughonthesales.

Astothetimingofthat,it'stoughtocall.AndI'mnotgoingtomakeapredictionbasedonthat,noramIgoingtotalkabouthowthatmayplayintothetimingofanystructuralmoves,becauseourtoppriority,regardlessofwhatwedostructurally,istobringthatbusinessbackintermsofsalesandprofits.Andsothat'swhythefocusis,asGregmentionedearlier,onmoredisruptiveinnovation,continuedstrongvalueoffers,allthethingsthatweneedtodotomakeourbrandpositionsevenstrongerinanenvironmentthathas,overtime,becomemorecompetitive.

Operator :

KeithSiegner,UBS.

KeithSiegner (Analyst-UBS):

Pat,I'mgoingtoapologizebutI'mgoingtofollowupalittlebitonthat.Look,marginsinChinahavecomeinmuchbetterthanyouexpected.Youreiteratethe20%--theconfidenceinthe20%long-term.Wetalkaboutthe$600millionandit'snotsurewhenthere'stiming,orwhenthetimingwouldhappen.

Butletmeaskitadifferentway.Giventhesuccessintheproductivityinitiativesandwhatyou'veachievedonthemargins,itwouldseemtomethatyoushouldbeabletorecoverthe20%longbeforeyourecoverthepeakAUVs.Isthereanyreasonwhythatwouldn'tbethecase?

PatGrismer (CFO):

No,Ithinkthat'safairstatement,becausetheunderlyingeconomicshavegottenstronger.Soasthesalescomeback,theflow-throughwillbeatamuchhigherrate.

KeithSiegner (Analyst-UBS):

That'sitforme.Thanks.

Operator :




KarenHolthouse,GoldmanSachs.

KarenHolthouse (Analyst-GoldmanSachs):

Hi.I'mactuallygoingtonotaskaquestionaboutChina,butinsteadlookattheTacoBellbusinessintheUSwheretwo-yeartrendscontinuetoaccelerate.Justintermsofthemovingpiecesofthat,couldyouhelpusunderstandhowmuchofthatmightbecomingfromstillcontinuedgrowthinthebreakfastdaypartversusvalueversusanyotherspecificproductinnovation?

GregCreed (CEO):

IthinkthegoodnewsistheTacoBellperformanceintheUSisholistic,whichis--ithasgreatentrypricepointvalue.Theyhavehadgrowthinbreakfastfrom6%to7%mix,whichIthinktakesittolike$90,000.IntheWestCoast,itmakesusnowover10%.Theinnovationthatwasruninthequarterwascompelling,disruptive,andtheassetsareingreatshape.Thecustomerexperienceisimproving.It'sholistic.

It'sallthethings.Andatsametimeobviouslythey'restartingtoexperimentwiththingslikedeliveryandonthecuttingedgeofthat,themobileapp.Ithinkeverywhereyouturn,thisbrandissorelevanttoitstargetaudienceandIthinksoclearlypositionedwithproductsthataredrivenoutofrealconsumerinsights.

Ithinkthat'swhythey'vehadagreatfirsthalfandthat'swhyweremainconfidenttheywillhaveagreatsecondhalf,andobviously2016andbeyond.

KarenHolthouse (Analyst-GoldmanSachs):

Great.Thankyou.

Operator :

AndrewCharles,Cowen&Company.

AndrewCharles (Analyst-Cowen&Company):

Thanks.Twoquestionsforme.First,ifthekeytotheChinatermwillbeinnovationandbreakfastonlyrepresent7%ofsalesandseemstobeperformingwellalready,whynotdoubledowneffortsonlunchanddinnerinthebackhalfoftheyearandcontinueinnovatingaroundthesedaypartstoturnChinafaster?

GregCreed (CEO):

IthinkmyanswerwouldbehavingdonethismyselfwhenIwasrunningTacoBell,you'vegottobalancethisout,whichisyou'vegotallthesedaypartswe'regoingtotrytogetgrowthfrom.

Andwhatwe'veseeninthepast,evenifwesortofoverinvestincertainareas,it'sbettertohaveabalancedspendbehindbreakfast,lunch,anddinnerandthenevenifyou'vegotenoughmoney,thedaypartslikelate-nightandsnacking.SoIthinkthatthisyearwe'vegotgreatproducts.

They'reputtingalotofmenandresourcebehindit.We'vegotthecurrentpromotional,thewingbucket,whichisofftoanicestart,andIthinkthatthereisbalancedinvestmentbehindallthedaypartsistherightwayforustoinvestinthebusiness.

PatGrismer (CFO):

ThisisPat.IwouldjustbuildonGreg'scommentsbyhighlightingtheimportantrolethatcoffeewillplayinbuildingmultipledayparts.Sowhileit'sanimportantpartofourbreakfastdaypart,italsocontributestoafternoonteatimeanditcontributestolate-night.




Andweareveryexcitedwiththeresultsweareseeingfromcoffeeandhowithasliftedsalesatthe2,000unitsthathavealreadygottenthepremiumcoffeeprogram,andwewillbeexpandingthattomoreunitsbytheendoftheyear.

AndrewCharles (Analyst-Cowen&Company):

Sofarthisyear,there'sbeenaseasonallyhighamountofKFCChinastoreclosures.Arethesestores--howwouldyoucategorizethem?AretheyprimarilylocatedinTier1tier2?Again,what'sdrivingthedecisiontoclosethesestoresratherthanrefranchisethem?

PatGrismer (CFO):

ThisisPat.Wemakethoseclosuredecisionsoneunitatthetime.It'snotalwaysafunctionofunderperformance.Theremaybeforcedclosuresdueto--comeupupontheendofaleaseandweren'tabletorenewonfavorableterms.Sotherecouldbeavarietyofthingsdrivingthat.

Butwedon'texpectasubstantialincreaseinKFCclosuresforthefullyearversuslastyear.Andinfact,weexpecttotalclosurestobeslightlydownversuslastyearbecauselastyear'snumberwasproppedupbysubstantialconsolidationoftheLittleSheepestate.

Operator :

JeffFarmer,WellsFargo.

Jef f Farmer (Analyst-WellsFargoSecurities):

Thankyou.Sorry,Greg,tokeephittingyouonChina.ButthelasttimeKFCChinasawarapidsame-storesalesrecovery,theconcepthadasizablemixandmenupricingtailwindwithitlookslikemixalonerepresentedmorethanhalfofthat21%same-storesalesgrowth.

Theconceptisstillinthesecondquarterof2014.Sowiththat,howshouldwethinkingabouttherolemixandmenupricingareexpectedtoplayintheChinasame-storesalesrecoveryincomingquarters?Andtothatpoint,haveyoualreadybeguntoseethereturnofthehigheraveragecheckfamilyvisitsthatwereabigbenefitayearagointherecoveryprocess?

PatGrismer (CFO):

ThisisPat.I'llrespondtoyourquestionandGregmayaddsomethings.Butfromasalesrecoverystandpoint,ourfocusisprimarilyontraffic.It'srebuildingtraffic.

Fromapricingperspective,ourpolicyisunchanged,whichiswegenerallylooktopricingtoworkwithproductivitytooffsetinflation.Weareveryconsciousoftheimportantrolethatvalueplaysinbuildingtrafficovertime,sowewouldn'texpectmixtobeanoutsizedcontributortosalesgrowthgoingforward.Theemphasiswillbemoreontrafficdriventhroughacombinationofvalueandinnovation.

GregCreed (CEO):

Iwouldjustechothat,whichisthisisgoingtobeabalanceofdisruptiveinnovationandvalue,andIthinkthecombinationofthoseisexactlywhatweneedtofocuson.

Jef f Farmer (Analyst-WellsFargoSecurities):

Justaquickfollow-up,wheredoespricingstandrightnow,menupricing,oractuallyheadingintothebackhalfof2015?





ThisisSteve.Pricingisabout3%andthatshouldbeprettyconsistentthroughtheyear.Andjustanotherdatapointonyourquestion,thequarter,thecheckwasrelativelyflat.Itwasupabout2pointsbutitwasprimarilydrivenbytransactions.

Operator :

R.J.Hottovy,Morningstar.

R.J.Hottovy(Analyst-Morningstar):

Thanks.IactuallyhadaquestiononIndia.Obviously,it'sasmallpartofthebusinesstodaybutonethatyou'vespokenaboutinthepasthavingagreatlong-termpotential.You'venowhadthreequartersofdouble-digitcompdeclinesintheregion.Justcuriouswhat'sdrivingthat,andifthat'schangingsomeofyourthinkingaboutlong-termunitpotentialintheregion.Thanks.

GregCreed (CEO):

IthinkweremainverybullishonIndiainthelong-term.There'snoreasonnotto.There'smassivepopulationandurbanizationofthatpopulation,andthere'sobviouslyunderlyingeconomicgrowth.

Ithinkthatwedidexpect--IthinkwiththeModigovernmentchange,theremayhavebeenasortofperceptiblechangeinconsumerperception.AndlikeIguessthatprobablyhasn'thad--wehaven'tseenthat.

WhatIlikeisthatwehaveanincrediblystrongteaminIndia,andIhavetosaytheyareprobablythebestteamwehaveatbuildingknow-how.TheIndianteamdonotsufferfromnon-embeddedhere.

Andtheyareveryaggressivelylearningwhatwe'vegotandwhatisworking,asIsaid,incountrieslikeAustralia,SouthAfrica,theUKandRussia.Andtheyarealreadyconcepttesting,andtheyrecognizethatvalueremainsanissue,entrypricepointvalueremainsanissue,andobviouslyinnovation,sothesamethingswekeeptalkingabout.

ButwhatIwanttogivethemcreditforisreallyreachingouttothelistofYUM,buildingknow-how,takingtheadvicebackintoIndiaandwitharealsenseofurgencyactuallypullingthemintothemarketplace.SoIamlong-termbullish.IlovetheteamandIthinktheyaredoingalltherightthingsinordertoacceleratethesortofimprovementmomentuminsame-storesales.

Operator :

PaulWestra,Stifel.

PaulWestra(Analyst-StifelNicolaus):

Great.Thankyouverymuch.JustforsomeclarityonChina,maybehelpherewiththelastquestion,whenyousaythecompperformanceisalittlebitbelowexpectations,youmeanbelowyouroriginalpositive3%to7%,soyourcommentstodaysayingcompscouldbeinthelowsingledigitpositives.Second-halfcompsarestilllookingtobemorepositivethanthefirsthalfwasnegative.Ijustwanttomakesurethat'sclear.

GregCreed (CEO):

Thatiscorrect,absolutelycorrect,Paul.





Great.AndthenwhenyoumentionedyourtransactiontrendsonaDClinebasiscontinuetosequentiallyimprove,youareseeingsequential,again,month-to-monthtrafficrecoveryversus--yes.

PatGrismer (CFO):

Iwouldn'tsaymonth-to-month.Certainlyquarter-to-quarter.Weneversaidthattherecoverywasgoingtobelinear,andsothere'snaturalchoppinessfrommonthtomonth.Butaswestepbackandlookathowtraffichasrebuiltsincetheincidentlastsummer,weareseeinganice,steadyimprovementinthatcurve.


Okay.Iguessthenmylastsortofnewrealquestion,IguessgobacktothecoloronyourChinaaveragecheckstrategyIguessmaybebeforethedualcrises,myunderstandingandIknowpartoftherenovationprogramwasifanythingdesignedtoenhanceKFC'ssortofpremiumbrandposition,maybemovethecheckup,allthingsbeingequal,movepeopleupthemenu.

Wecertainlycanunderstandthefocusontraffichere.Isthatstillasortoflatentopportunityintermediate-termorhowdoesthatplayinIguessthenewmenuhere.

GregCreed (CEO):

Ithinkthere'sacoupleofthings.One,theamountofremodelinggoingoninChinaisaccelerating,enjoywhat'scomingandIthinkfoundawayforustobemuchmorefocusedonourremodelingoftheassets.Sothegoodnewsiswearesortofdoublingthenumberofassetsthataregettingremodeled.Sothatisagreatwayofkeepingourassetsrelevant.

AndthenIthinkit'sjustbacktothepointwe'vebeenmakingalsoaboutbalance.WeactuallyhavetobalancepayingmenuwithwhatIcalldisruptiveinnovationandwowvalue.AndIthinkourabilitytodothataswellasimprovetheassetsandobviouslydeliverasuperiorcustomerexperience,allofthosecombinedwillbewhatsortofmakesuslong-termsuccessful.Andaswekeepsaying,yes,wewillhaveastrongsecondhalf,wewillgopositive.Weremainveryconfidentinthelong-termofChina.


ThanksPaul,andthankyouallforjoiningustoday.Thisconcludesourcall.Thankyou.

GregCreed (CEO):

Thankseverybody.

Operator :

Thisconcludestoday'sconferencecall.

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