Yum! Brands' CEO Hosts Investor Update Meeting (Transcript)

| About: Yum! Brands, (YUM)

YUM! Brands, Inc. (NYSE:YUM)

December 06, 2012 8:45 am ET


Tim Jerzyk - Senior Vice President of Investor Relations and Treasurer

David C. Novak - Executive Chairman, Chief Executive Officer and Chairman of Executive/Finance Committee

Patrick Grismer - Chief Financial Officer

Weiwei Chen

Angela Loh

Muktesh Pant - Chief Executive Officer

Niren Chaudhary - President of The New Standalone

Greg Creed - Chief Executive Officer of Taco Bell

Richard T. Carucci - President

Lily Hsieh

Steve Schmidt

David Gibbs

Jonathan D. Blum - Chief Public Affairs Officer and Senior Vice President


Jeffrey Andrew Bernstein - Barclays Capital, Research Division

John S. Glass - Morgan Stanley, Research Division

David Palmer - UBS Investment Bank, Research Division

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Gregory R. Badishkanian - Citigroup Inc, Research Division

Jeffrey F. Omohundro - Davenport & Company, LLC, Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Alistair Scobie - Atlantic Equities LLP

Paul Westra - Cowen and Company, LLC, Research Division

Jason West - Deutsche Bank AG, Research Division

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

Tim Jerzyk

Good morning, everybody. Good morning, and welcome to you and all of the attendees on the -- on our webcast. We appreciate you being here. And for our Yum! Annual Investor Update, I'm Tim Jerzyk, for those of you who do not know me. Before we get going, we have to do the technical stuff here and be sure that we cover off on all what we have to do. The information that we have here is as of 12/6 of this year.

Today's presentation will include forward-looking statements, so please include the Safe Harbor statement and all your thoughts about today. And also, our website includes reconciliation of any non-GAAP financial measures, which you will likely see today. The reconciliations may be found at -- on our website at www.yum.com/investors.

So the one thing I wanted to do today was to give you a little bit of a preview before we get started. We have a great lineup of presenters from the leaders at Yum!. You've heard this story. You've seen this chart many, many times. Early, early days, our prime mission in -- for our shareholders was to deliver consistent double-digit EPS growth every year. And as you know, you're all familiar with it, our target is to deliver at least 10% EPS growth every year, and you can see we've done that for the last 10 years and actually exceeded that, and we expect to do that again this year with at least 13%.

Now the one thing that we emphasized, really going into every new year, is that the strong foundation that we have around this, why does this happen? There's a lot of reasons that it happens. But we have a strong foundation of global development that supports this growth. So when we go in every year, just like what we told you coming into -- going into 2013, we have already built a record number of new stores this year. So a good portion of our EPS growth is in the ground, waiting to generate profits next year.

And one of the things, after all the conversations that we've had over the years, I know one of the things that's important to you is, what are some of the changes on the margins? You don't ask it that way, but you're asking that. So I thought I'd give you, kind of, my view of what are really important changes on the margin, particularly related to development because that's -- day-to-day, that's how we're really adding shareholder value.

So China, the news there is we've been a powerhouse developer. We've got great capability, but we're going to be even more so broadly developing than we have in the past. And you're going to hear the news about that.

In YRI, we're taking a winning model, kind of, you could say, from the U.S. Pizza Hut business, and we're translating that to even more worldwide development, more growth. And in India, the third B, no, I'm not changing the alphabet, but as you see this year, we're going to build over even -- we're going to build over 100 units next year, at least 150. India is becoming a contributor to our unit development at Yum!. And in the U.S., you and I -- many of you have had many conversations about our U.S. business, but there's changes happening in the U.S. business that you need to be paying attention to, and I'm going to give you a little headline on that. Growth is alive and well.

So first, China. We -- there's no doubt that we've had breakthrough development in the top categories, and for sure, led by KFC over the years. WQSR -- KFC is, by far, the leader in Western QSR in China. If you look at the timeframe that I've got on the slide there, 2000-2011, 85% of our unit growth has been generated by KFC. KFC has been a big powerhouse.

And then on the -- further to the right, the other bar charts, so where we are today? Yes, we have a tremendous distribution system that's national in China. We can go anywhere, and you can see we have gone inland. But today, it's 30% inland, still 70% coastal. And if you look at it by tiers, it's roughly 50-50 when you group Tier 1 and Tier 2 together, so the top tier cities, and then the Tier 3 and below.

Those are going to be changing going forward. You're going to hear that today, much more broad development. We've shared with you, over the last year or so, the great returns that we're getting in the lower tier cities and also in new cities. Well that's going to be a more -- more of an emphasis on that going forward. So that 30% -- the bottom 30% and the bottom 50% are going to become more impactful. The good news is that Tier 3 through 6, that's 1 billion people, 1 billion people, that's B.

So breakthrough in the other -- in another category, Pizza Hut China business, the Casual Dining business, you can see on the charts here, 2009, that was less than 12% of our development growth in China. Well, we've reached the breakthrough point this year. And in any conversations I've have had with you this year, I've been trying to point that out.

This is a big deal. Pizza Hut Casual Dining, we're taking that now to the lower tier cities, where, as I said, Tier 3 and below, that's 1 billion people that will now be able to access Pizza Hut Casual Dining. For 2012, it's going to be at least 25% of the development, and that number will likely grow going forward.

So just to give you another little bit of a different slices of this, this is pretty important, this is pretty much a big deal. If you look at the U.S., there's about 15,000 casual -- chain casual dining restaurants today with a consuming class of about 300 million. And we have talked about this, many of you know, we -- the consuming class in China is expected to double. We think it's about 300 million today. We think it will double by about 2020 to 600 million. So if you just take simple math, that could be a market -- China could be a market with 30,000 chain casual dining restaurants. Even if we're off by 10,000, that's still a big number. So we're getting after it, and this year was definitely a breakthrough. So Pizza Hut Casual Dining in China, we're expecting to open 220 units. You can see that's almost doubling the last year's pace and quite a bit up from 2009. So this is really -- this is big news.

Now the interesting thing here, because I wanted to get a sense for -- okay, the 220, how does that stack up for -- compared to the U.S. casual dining, mid scale, the builders in the U.S.? We just -- there's 6 different companies that you have to stack up to get to 221. That's how big the development this year alone is for Pizza Hut Casual Dining.

Onto YRI. So what's new to YRI? Well, you may have heard, I'm sure if you've been listening to our calls, Pizza Hut U.S. is now experiencing net unit growth for the first time in at least a decade, and it's all because of the teams that did a great job in developing a high return, lower cost, delivery carryout model, Delco, as it says in the picture here on the left. And because of all that work, certainly that and as well as the great work YRI does, we're now taking that -- those learnings in developing Pizza Hut delivery on the YRI side at a much faster pace, and that's just getting going.

So you can see on this chart, this year, we expect to build about 190 of those in YRI from just only less than 100 back in 2009. So on the margin, this is becoming a bigger contributor to unit growth for YRI. And you can see on the right, that's just a mockup of one, but -- and those are the top 5 countries currently that are contributing to the growth for that 190 this year. So good news at YRI in terms of development, with a record year this year and probably another record next year.

India. So it begins with a B -- the population begins with a B. And as you've always heard from us, as being a big restaurant developer, a growing economy like India with a population that begins with a B is a place that we want to be. And you can see on the left, obviously, we've gone after what we think is the biggest opportunity in the 21st century from a restaurant perspective with China, where there's -- the population is 1.3 billion. We've added another B. We're going to make over $1 billion in China this year.

So with India, we're just getting started. You're going to hear from Niren Chaudhary today. You heard last year the story about how we're going about building a really big business this year, and we're starting to see development really start to kick in and contribute to Yum!. For next year, we expect at least 150 new restaurants in India. And the story there is -- part of what makes Yum! great is we're a portfolio of brands, and we're going to be all in with all our brands in India.

Onto the U.S.. As I said there on the slide, U.S. growth is alive and well. Taco Bell has been growing consistently, their unit growth, over the last several years, and we expect that to continue. You're going to hear more about that today. There's some really good news that you're going to hear from Greg Creed, and the really fabulous news, as Pizza Hut in the U.S. is adding net units. And this year, they're going to triple the pace that they had last year, which was the first time in a decade, where they had net unit growth. So it has definite picture -- the story has definitely changed in the U.S. Our top 2 brands in the U.S. are now net unit positive in developing. Every year, we've given you our view of the valuation of our company, how much we think Yum! is worth, and we put our best minds on this, in Yum! finance, because there's a lot of great brain power here, and that's what you all do for a living. So we really went to search the best and the brightest at Yum!, and we have deployed Jesse Weaver and Advisors on this.

So what's the value of China, plus YRI, plus the U.S. business now, plus India? We did 4 different views of this. We did 2 different sum of the parts. We did a several discounted cash flow views, and then we also looked at Yum! in total compared to what we think our trading comparables. And where we add up to is at least $85 a share. So today, I'm standing here and seeing the latest posting by Mr. Marketing going, "Really?" We think it's $85 a share at least. And the range of all these is $80 to $90, discounted cash flow. You could see the dollars at the bottom in terms of enterprise value. The -- sum of the parts, the one that we've done historically, which is a little bit different, we separated China and then we split the franchise business from the company side. And I -- in looking through our valuation and trying to assess -- so what is Mr. Market missing about the value of Yum!? If we think it's $85 a share and we believe that, what is it? We think it's the franchise revenue stream. We think it's undervalued when the market is valuing Yum!. $1.8 billion in revenue is from franchise royalties this year.

So let's look at today. This is the lineup of presenters. And as you would expect, David Novak, our Chairman and CEO, will start off the day. One of the questions -- frequent questions I get from all of you when we meet is, "How do you share -- are you sharing your great ideas that pop up around the world? You have businesses around the world. Are you sharing those ideas?" The answer is yes. And David Novak will take you through our building global know-how and putting process around that.

Pat Grismer, when we shared with you last year our 2020 earnings growth model. Pat's going to update you on where we stand today, still alive and well. We think we have one of the more sustainable growth models in the business, and Pat will give you a good update on that.

Weiwei Chen, our new Yum! China CFO, is here to take you through our -- an update on the China development machine, truly a machine, all-time record this year, and you'll see that, as I said earlier, broadly developing across China, now with 2 brands. And Pizza Hut Home Service is waiting in the wings.

Angela Loh, many of you have met her, our Yum! China Chief Concept Officer. She's going to take you through our brand review. The good news there is our brands have never been stronger, and you'll see that.

And then Micky Pant, our YRI CFO, is going to give you an update on where we are with YRI. This is one of the things also we've talked about. We really believe the value of YRI is significant and maybe underestimated, the long, long runway for growth, franchise-driven model and its emerging market powerhouse. You can't really beat that. There's not many companies that you can say that about, and that's YRI.

And Niren Chaudhary is going to come up and give you an update on our India business. As I've said, we're all in with all brands, and he's going to give you a good sense for where we are with each of them.

And then, Greg Creed, you're going to hear some great news there. One of the most interesting things is -- part of what he will show you today is a good update on where we stand in terms of our operating capability and, actually, our performance at Taco Bell, in an external validation of the great job they're doing at Taco Bell.

And then, Rick Carucci will come up and put it all together in terms that we always talk to you about, we're very focused on building shareholder value. I hope you get that, and our view of that is very simple. David has been very good about every presentation within the company when meeting with you. Our view is very simple. It's all about net unit growth, same-store sales growth and high returns. And that's what Rick will talk to you about.

And we'll have the Q&A session and the event will end, and we'll send you off, if you're interested in leaving, with a boxed lunch or you can go on to the lobby and grab a boxed lunch and come back for our financial modeling session, which we've had every year with, basically, the finance team, and we're getting to more detail on what we expect for next year.

So with that, I'd like to bring up David Novak, our Chairman and CEO.

David C. Novak

Thank you, Tim. I appreciate that. All right. The theme for our conference today is we're going to deal with the fact that we're on the ground floor of global growth with China and so much more. But internally, what our future-backed vision for this company is, is that we build the defining global company that feeds the world.

We have 3 phenomenal brands. We've come a long way as a company. And one of the things I think you'd all agree with, when you go to work everyday with your companies, you're much more pumped up if you go to work everyday, thinking you're working with a great organization, working on something that is inspiring and it can set the right example for others. And we definitely believe that our 1.4 million people around the world want to go to work and be a part of something great. And given the growth of our company, the stature of our brands, we think they can set the standard for what a defining global company ought to look like.

And we really identified the 3 things that we want to set our company apart on and -- so that other companies will come to us, just like we went and continued to go to great companies in the world to learn from. People have come to us to learn how you really become a truly great, defining, global multi-national company.

The first thing, obviously, is you got to keep getting results. People are never going to come to you if you're not getting results, so we're very results-focused. But we've got brands that are, in the part of the vernacular, in the part of life, everywhere you go. And our job, first and foremost, is to build vibrant brands -- make our brands even more vibrant with operational excellence as our foundation.

The second thing is, is -- what we're seeing is that people -- when you want to work in a company, you want to work in a company that's making a difference in the world not only with the brands that you offer up and the products and services that you provide, but you also want to make a difference in the world by making the world better not only in terms of what the brands do, but also in terms of how you impact others that are less fortunate. And what I'm really pleased to say is we really believe having a company with a huge heart makes it a big difference. And we've partnered with the World Food Programme. And this year, we will raise $33 million for the World Food Programme. We will also -- we also just launched a global volunteer effort with our team members around the world, which we think will be the largest corporate sector volunteer effort in the world. And our people are really pumped up about that, makes feeling more proud to be a part of our company.

And the bedrock of our success, really, is people. Our formula for success is build your people capability. If you get that right, you're going to satisfy more customers, you're going to make more money, and we drive this theme home year after year after year. And the thing that we think really separates a good company from a great company is the culture that you build. And our company is -- we want our company to be famous and really set the example, famous for really recognizing others, having fun doing it and making sure that everyone in our company, no matter what level they are, they count. And that if everybody does their job and piece -- and their piece of Yum!, when you add it all up, you'll end up with great results.

Now one of the things that all of our leaders have in our company is they have their own individual recognition award. This is my individual recognition award. This is the Yum! Award at Yum! Brands. It's catching people walking the talk on behalf of our customers, and I always recognize people when I see them doing that. And also, living the behavior is what we call our How We Win Together principles, things like going for breakthrough customer mania, demonstrating the belief in people. When I see people exhibiting these kinds of behaviors, I give them this recognition award, and my office is basically filled up with pictures of people I've recognized all around the world over the last 15 years and actually have pictures of people I've recognized on the ceiling and because people always want to see the CEO's office, and it's a great way to symbolize what our business is all about, which is people.

And I want to do some recognition here. Many of you know Tim Jerzyk. He has been our Investor Relations leader for the last 12 years. And in the first quarter of this year, he is going to be retiring. And Tim has done a phenomenal job. He's recognized as the top Investor Relations Executive in our industry by both the sell side and the buy side. And, Tim, if you'd come up here, I'd like to give you this recognition award. This is in lieu of all the extra money I should have given you, but I never did while you are here -- but this recognition goes a long way, okay? But I write on everyone of these because when you do recognition -- by the way, everyone of you guys are leaders, and everyone of you have people who work for you, and this is really easy to do, and it's very powerful. And I think if you can personalize your recognition, the more powerful it is. And I write on this, Tim, that I thank you for being the best IR leader in our industry and one of the best business partners I've ever had. One of the great things Tim has done is -- he's not only -- I call him our encyclopedia of sales because he's out pounding the doors, selling Yum! everyday, and no one does it better than him. He's tireless. We've built shareholder base in Europe because he went there, and he's gone to Asia and he's been with many trips with many of you. He's truly been just a great salesman for our company, but he's also been a business partner.

One of the things we learned from you, you know our business, you constantly challenge us, you give us sometimes more ideas than we want to hear. But he comes back, and he gives me these thoughts and what he's learned and also he knows our business cold and he's been a great business partner. And I'm going to miss you very, very much, and I thank you very much. This is Yum! Award 917. We'll also give away $300. It's inside here, which you can give to Megan, who's Tim's wife, who's here. We thank you very much as well, Megan, okay? But thank you very much, okay?

I just skipped over a picture of Tim giving a Yum! cheer, and all of our meetings start out with Yum! cheers all around the world, and I always start out with Yum! Awards. I think -- one of the things we have to do as leaders is we got to be driving positive energy. We want to be impacting the people that we have the privilege of leading everyday. And so, I do Yum! cheers all the time, have a lot of fun doing. I always love to do it when we're celebrating big achievements.

This is what I did back in 2004, when we became investor-grade. You might remember, in 1997, when we we're spun off from PepsiCo, for the gift of being a public company, we've got a junk bond balance sheet and about $5 billion worth of debt, so we're on this march to get to investment-grade. Once we got there, we celebrated. It was a big deal. I'm pleased to say, today, we have a BBB balance sheet. We can invest -- we have all the capital we need to invest in our existing business. We're ever increasing our dividend. We're buying back stock, but our financial capability has never been stronger, and we've got great horsepower to take into the future as we move ahead.

Now here's my favorite Yum! cheer. This is in the Great Wall of China, where we had over 2,000 restaurant general managers doing the Yum! cheer there at their Annual Restaurant General Manager Convention. Now one of the things that I love, it's fun when you start something, and we started doing this Yum! cheer in 1997. And we had a terrible name back then, it's called Tricon. But we, at least, had a great ticker symbol. And so, we started doing Yum! cheers in our goal to put Yum! on customer spaces all around the world. Wherever you go, whether it's China, you pick the country, people are doing the Yum! cheers.

Now I ask you every year to do a Yum! cheer. You whine, you hate doing this, okay? But -- so I thought you need to have a training video, okay? So this is how we do the Yum! cheer in Kenya. We're expanding in Africa. We're now in about 20 countries in Africa, and we're doing the Yum! cheer there too. So now, I want you to watch this very carefully because after it's over, we're all going to do it like they do it, okay? Are you ready? Okay, let's take a look.


David C. Novak

Okay. Are you ready? Okay. On your feet, we'll make it simple. We'll just keep it like we do all the time. Stop the whining. Stop the grumbling. You might smile after it's over, yes. At least all the Yum! people there, do it with some passion, okay? Give me a Y. Give me a U. Give me an M. What's that spell? What's that spell? What's that spell? All right. Now you guys are actually pretty good this year. That's great. We just got to get you warmed up a little bit better, okay?

All right. One of the great things about our company is we're not reinventing the wheel every year. We have been executing these 4 strategies for over a decade now. And what we're doing is we're just flying in tighter and tighter circles as we go ahead. The first strategy we have is to build leading brands in every significant category in China. And I want to put China into perspective because I know there's been a lot of news about China in the last week or so here. But let me start of by just saying, in 2012, we had another great year. We had 6% same-store sales growth on top of 19% same-store sales growth. We added 800 new units. That's over $1 billion in system sales, and we continued, on average, to have 3-year cash-on-cash returns, cash paybacks. So this is a very, very powerful business that had another very, very good year.

Now in Q4, we raised a little bit of tension last week when we announced the fact that we expected our same-store sales to be down 4% for the quarter, and we think that, that can be attributed somewhat to the macros. But you know what? We've never whined about the macros. We've never whined about the weather. We think it's -- more frankly, we think it's more -- it could be more attributed to our overestimation of our ability to really overlap a very tough lap of 21% same-store sales growth last year. But we still had 17% same-store sales growth.

Now I was thinking about this, when was the last time we had negative same-store sales growth? And it reminded me of 2009, where, actually, for the full year, we were down 1% in 2009. And in the fourth quarter, I remembered coming to this meeting, and we're actually down 3% for the quarter. And we got all these questions, all these questions, "You're growing too fast. The days of China are over. Boy, there are people, competition is coming in. Will you be able to grow same-store sales? What's the -- is your business model okay?" And I think all of these questions are always good questions to ask. We ask these questions all the time ourselves. We're constantly looking at our business model and constantly evaluating where we stand. But when we looked at what actually happened since 2009, when people were asking questions about same-store sales, our business model, are we growing too fast, well, first of all, the average unit volumes since 2009 have gone from $1.3 million to $1.8 million. Our profits have gone from $600 million to $1 billion. We have added almost 2,000 stores since 2009. I think it's 1,963 to be exact. We not only have a power brand with KFC right now, but as Tim just showed you and you'll learn more about, we have our power brand with Pizza Hut Casual Dining. And also, what you're going to hear today is we have Pizza Hut Home Service now ready for more expansion.

Now the big question I know you have right now is, what's going to happen in 2013? And I'm not a soothsayer. I don't know for sure what's going to happen, but here's what I know. Now every year, we do annual operating plans everywhere. We go to the divisions, we get into the details of how we expect to have a good year, why we think we're going to win in the coming year. And we always have a beat-year-ago mentality. That's -- one of the things that we have ingrained in this company is that the only way you are going to have a better year than the previous year is you got to have better programs and keep getting better and better and better. But it has to come from a base that's strong, and it starts, first of all, with how strong are your brands. And I have to tell you, and Angela will show you, that our brands, by every metric that you can look at, have never been stronger. We're winning on quality. We're winning on variety. Minimally, we're tying our competition on value, and even Pizza Hut Casual Dining has a better value rating than quick service restaurants. So if you want talk about a powerful brand, Pizza Hut Casual Dining has definitely become that.

So clearly, we have great brands that have only gotten stronger in the last few years. We also have very strong marketing plans. Our marketing calendar has been very strong. We have lots of innovation in the pipeline. We're continuing to have lots of innovation in China. You're going to see more of the kind of innovation we think that will drive this business. And remember this, we added 800 stores. When you add 800 stores, you have 800 more stores contributing to the marketing funds. So we now have more scale and more marketing dollars that we can bring to bear in terms of building our brands and driving our sales.

And last but not least, we have a fantastic team. There's no doubt that this team continually delivers year-after-year, and it's underpinned by what we think is the best operations of any food service brand anywhere in the world. We have unbelievable operating capability in China. Now I can't predict exactly how we're going to do next year, but I'm very confident that we're going to have solid same-store sales growth. And if you look at our trends going in, it's going to be a little softer in the first half of the year, and it'll pick up and be stronger in the second half of the year. But I'll tell you what, standing up here today, I believe in our China business model as much today, if not more, I am actually saying more today than I ever had. I really believe that we're on the ground floor of a very continuous growth in China. I don't know if that's very articulate, maybe it's not but it's big, okay? We feel good about it, okay?

Now China is the retail opportunity in the 21st century, and we've been saying this for a long time. And we might have our ups and downs, but I'm always going to wake up and say, "Thank God we're in China. Thank God we have the infrastructure we have in China. Thank God we have the team in China. And, boy, are we in the right place at the right time, and I wouldn't trade places with anybody." And that's my story, and I'm basically sticking with it. Okay.

Second strategy we have is to drive aggressive international expansion and build strong brands everywhere. Now this year, we had a leadership transition, Micky Pant took over as the CEO of Yum! Brands, and he proved quite conclusively that Yum! Brands can grow regardless of who's in charge of the brand, okay? But Micky quite frankly has done a fantastic job. In fact, he gave me that line. Yes, I mean, he's a very humble leader, but he has restructured YRI, focused more on the growth opportunities, and we are making more bets in emerging markets, getting stronger in emerging markets, and we've re-franchised where we need to re-franchise, in places like the U.K., our business models are getting stronger everywhere, and we really think that we've got great opportunity, particularly in the emerging markets as we go forward.

Now last year, someone asked me in the audience, they said, "David, what -- which brand do you think will surprise us next year, or what are you most excited about?" And I said, "Well, it might surprise you but I'm actually -- I actually believe that Taco Bell is going to have an outstanding year." Because even though last year was a difficult year, Greg Creed and the team did an outstanding job of setting the foundation for us to launch new initiatives that would take the brand forward, and which really kind of takes me to this third strategy we have, which is to dramatically improve our U.S. brand positions, consistency and returns. And you'll see today, and Greg will take you through it, that we really have Taco Bell going, we really have Pizza Hut going. KFC itself in the U.S. is still our slowest growth U.S. brand, but we've stopped the decline. That the U.S. has been restructured, revamped and reenergized, and we feel very good about our ability to keep it going in the U.S..

And then, last but not least, we're very proud of the fact that we have the highest return on invested capital -- or one of the highest returns on invested capital in our industry. And we're going to keep that going. We're very mindful of how we spend our capital, and we want to drive industry-leading, long-term shareholder and franchisee returns. And Tim brought up a very good point. We have $1.8 billion of franchise fees. That's a very powerful economic engine and a differentiated economic engine for Yum! Brands.

Now when you look at this, with the U.S. business, with YRI and India, which is starting to take off and is now a new division of ours. And in China, we have a very powerful portfolio that's allowed us to really generate very consistent double-digit EPS growth. And we really focus on this all the time because what the key to being a great company, the key to be a defining company is you've got to get consistent results. You don't want to have good results 1 year and then bad results the next year. You want people to basically count on the fact that you can continue to deliver and no matter what the time may be like. And clearly, the last 5 years have not been easy by any stretch of the imagination. So we're very proud of the fact that we are a consistent double-digit EPS growth driver.

The other thing that we're very pleased with, obviously, is that we've had outstanding shareholder returns, far exceeding the S&P performance -- S&P 500 performance in the last 5 years.

And when you step back and you look at our company from where we were in 1997 to where we are today, we're really big. We had gotten to be a big global country -- company. We're in 120 countries. We have 38,000 restaurants around the world. We have 1.4 million associates. We have 20 business units. We have 3,000 franchisees. This is a big company. Now when you're big, it's exciting because you have the power of being big. But when you're big, it can be really bad. Because you can become slow, you can become bureaucratic, you can be -- you can get very ancillary and you don't look outside, and you get to be confident, so confident that you really think you've got it all figured out. This is a disease. This is a disease, and what we really are trying to do is wipe a disease like that out. We never want it even to occur. Now people ask me all the time, they say, "Tell me about your company, tell me about something that you don't see." So it means I always try to talk about something that you might not see in the numbers. It's something that really drives performance. Anybody will tell you today that if you really focus on the outcome alone, you'll never really get to the outcome. But if you focused on the right processes and putting those in place, if you execute those processes, you'll get the outcome and the result that you're really looking for.

So one of the things that we have really done is we're really waging a war of our own just on making sure that as we get big that we wipe not a minute out and -- not a minute here out of our culture, and this avoids what I call big company-itis. And so the big thing that we're trying to do is make this big company small, and one of the big things that we can do, as we do have 38,000 restaurants, we do have over 20 business units, if we can get -- treat those 38,000 units as laboratories where we can learn and get people sharing the ideas and spreading that and driving that, then being big becomes a huge competitive advantage. And that's exactly what we're out to build. And I want to talk about how we do this. What we're doing to really make this a reality.

First of all, we have what we call our How We Win Together principles. These are the principles that we train people on all around the world when they join our company and we drive it home in everything we do from the recognition that we do to everything we do, as you will see. One of the behaviors that we really drive very deep is building know-how. And what we want to do is make sure that our people know that the key to our success is for everybody pursuing knowledge and building process and discipline around things that we know that work all around the world, being avid learners, going after know-how, getting know-how that will literally build more and more capability and allow us to get better and better results.

So what we've done is -- we've really done tremendous amount of training on this. We have launched and cascaded and continue to cascade and launch and reinforce what we call Achieving Breakthrough Results training all around the world. We have -- when I go to India, I can meet with restaurant general managers, they'll take me through the Achieving Breakthrough Results, who are there using, to drive results. And one of the big things that we teach everybody is that to get breakthrough results, you've got to have high intentionality. You got to believe it can get done, and then you've got to put the right methods in place that will get those results. And the first step that we teach everybody, when you start any initiative, is seek know-how, where can you go to find know-how and build knowledge inside and outside the company that will help you get whatever you're working on done? And I can tell you the thing that I am most proud of that is happening in our company when I go around the world. And I'm looking at our annual operating plans, Greg Creed is talking about what he learned when he talk to Sam Su in China. Sam Su is talking about what he learned when he went to India and saw what Niren Chaudhary is doing when he was trying to emulate the Chinese model. And this learning is being cascaded and shared all around the world.

And we've also institutionalized processes to really make it happen. We created what we call ICHING, which is our internal search engine where, let's say, you're working on chicken sandwiches in South Africa, you can go in, enter chicken sandwiches, you'll find out what -- all of our recipes, what's working around the world, what hasn't worked. After every program that we do, we try to get summaries of the programs, so people can understand what we've learned and how we can basically improve.

So iCHING is an internal engine that we've developed from scratch to really spread our know-how. The other thing that we've done is, this year, we had a global digital summit, where we brought in all our chief information officers, marketing officers, key general managers, and we really brought in external people to tell us where digital was going, how we could really tap into this, so that we lead our industry on this front, not follow.

We also have market planning meetings every year. Micky Pant brings in all of our KFC marketing people around the world, and they spend a week going through every one of their marketing calendars and their key learnings. And then we do the same thing this week for all of our Pizza Hut CMOs. And this has been institutionalized, and you can't believe how the knowledge spreads. And then we're using technology now. We have global functional webinars. Anne Byerlein, our Chief People Officer, started this. Now Roger Eaton, our Chief Operating Officer, is focused on operational excellence. And I just sat in on a global operations excellence webinar just a few weeks ago. But we put in processes, in systems in using technology to make the big company small and to share the learnings that we have.

Now one thing I'm sure all of you know is the more focused you can get on doing this, the better. And you're going to see today how Micky Pant has really taken our global business, and we focused around sharing around emerging markets, developed markets, we've taken market types that are more similar. And we have our GMs working in pods, basically, taking on specific projects that are relevant to developed markets or emerging markets. We actually had Sam Su, we had all of our emerging market GMs go to Shanghai and they spent a week with Sam Su on learning the China business model and figuring out how we can take that and spread that into these emerging markets.

We actually took our big franchisees, along with our general managers, from the emerging markets to Shanghai. It was a very, very powerful meeting and then Sam is going to follow up and have another meeting with them in May of next year. But this is all getting institutionalized now. It's not an accident, it's something that is really working for us.

And then, I think, you all recognize that the fact that people do what you reward them on. And we have defined very clearly how you get promoted at Yum! Brands. You've got to be a step-change thinker, a know-how builder, action driver, a people grower, these are 4 things that we rate people on. And know-how building is right in that group, and we always are asking when we're doing our 360-degree feedback, does this person solicit input and feedback from other people, other sources? Is he or she a know-how builder? And then all of our individual development plans are geared towards, this is where you can go to build your know-how in these areas because this is how you can become better.

And then people do what you reward. And so our HR systems are geared around promoting people for really demonstrating their ability to celebrate other people's ideas, as well as their own if not better. And we also have team bonuses. I pick a market unit every year around the world that has done the best job of sharing know-how to other people, and then I pick a business unit that's done the best job of taking the know-how and applying it in their markets and then I give them an additional team bonus.

So all of this, when you start doing this, people say, hey, this is important, and people basically want to do what gets recognized, what's going to help them get recognized and grow in the organization.

And the last but not least, you got to just keep driving this home, again and again. I love doing this presentation right now with you. Because this is going to be webcast internally, people are going to be listening to this, and they're going to know you want to move ahead in this company, you better be a know-how builder.

So everything you do, you use to reinforce what's really important. And so we have our daily news of interest, we have my own blog that I talked about last year where I'm constantly sharing what I'm learning around the world. After every earnings call, we have a talk to David, we put into perspective and we always take one subject, where we go deep on sharing what we're doing in a particular area that might have relevance to other people. But this constant communication really, really works.

Now all that sounds great. That's the process we put in place. What's the outcome? What's the outcome of all this? Well, let's just take this as one of our biggest examples this year. For years, we've had a relationship with PepsiCo. We went to Pepsi, and we talk about beverages every year. We do. But PepsiCo also has Frito-Lay. We never met with Frito-Lay. We never sat down with them and said, what can we learn from you? How can we apply some of your technologies to our business? Now we haven't had -- I think there's like -- we haven't had an innovation on the basic taco shell for 50 years. There hasn't been any innovation on that basic taco shell for 50 years. We introduced Doritos Locos Tacos, which came from Frito-Lay, which came from Greg Creed getting together with Al Carey at Frito-Lay and together, our management team is working. And now, we've got lots of ideas. And guess what? It's not only great ideas that our customers love, it's proprietary. No one else in the industry has it.

One of the countries that I recognize for taking best practices, with an additional team factor in their bonus, is Thailand. Because when I went to Thailand, I walked in and I saw their new back of house system or front of house system, which is called Fusion, where we have an order station, and then you pick up in 2 different places. This is driving speed of service, productivity, it's great. It specially works in high-transaction environments. And then I looked over to my left, and I saw the Krush Bar and the Krusher Bar, which was started in India because we're basically creating the store-within-a-store for our frozen line of beverages. Very successful in India, about 8% or 9% of our mix.

And there it is, right there in Thailand. And then I go and see on the counter, egg tarts, which is about 8% to 9% of our mix in China. And now, it's in Thailand and we have had incredible same-store sales growth in Thailand, but the reason why it they accelerated their performance by not starting up from the beginning by taking ideas that are working around the world and then bringing them in to Thailand, and it works.

Another outcome. Australia had an innovation a couple of years ago where they launched this box where they put a complete meal in a box.

That quickly went to Korea, wow box, a different local adaptation of it, great success as well, went to Kuwait. And then in the United States this year, has launched box meals. We even had a $20 box meal, which was very, very successful, and we have $10 box meals. And this innovation is taking our value equation forward, and by the way, nobody else in the industry is doing this. Something that we initiated, and it's working, and it's very, very powerful.

Here's a smaller idea, no pun intended, I guess, pun intended. We started out with KFC original recipe bites in Germany. All of our products is made freshly prepared in Germany, then we launched the same product in the United States with KFC original bites. Then the U.K. took it, and now has launched a spicy version called Hot Shots. But this is how it basically spreads. We don't really try to print out everything and say, do it exactly this way. We're looking for local adaptations off of something that we know works somewhere else.

And then one of the things they you look at our industry, the small box format has really taken off and it really drives new unit growth and capability, whether it's Five Guys or Subways or Walmarts small store. All these are examples in retail of how people have developed a smaller box format and really attacked our cost structure so they can grow faster. And Tim talked about Pizza Hut delivery carry out light. This whole new building that we now have and we're now a net new unit developer in the United States for the second straight year after 10 years of decline. And now, we're taking that idea and very committed to making a lot more progress in headway with delivery around the world with a better economic model, which we think we can scale more rapidly and compete much more effectively against the likes of Domino's.

And then we learn how other people attack people capability. We learn from Procter & Gamble that if you want to hire great marketing person, they have the best training and skills for marketing people, and anybody wants to get somebody from Procter & Gamble, if they got the ability to understand the marketing skills and drive action. So we look for those kinds of people because we know they've been trained well.

GE is famous for its leadership development. Southwest is famous for its culture. So Sam Su said, we're in this category in China, where we're growing so fast, we want to have leading brands in every significant category. The only way were going to do that is we got to keep working and building our management capability as we go forward. So in China, there's this one Whampoa Military Academy, which is all geared towards training great military executives. So we created the Yum! China Whampoa Academy with the goal of being the leading developer and trainer of retail executives for the entire country of China. So we tell somebody to come and join us at the management training out of school, in 4 years, you can become a restaurant General Manager, you can become a franchisee potentially, or you can go into any other retail company in China and pursue your career and you'll be trained. In this year alone, we brought in 15,000 management recruits.

We're getting ready for the future, and we're going to have the people capability, which is the bedrock of all of our success to allow us to continue to grow with the right kind of results. And here's an example of where we've scaled our leadership training and capability. For 15 years, I taught, and continue to teach, a program called Taking People With You, wrote the book. Then we translated it into 11 different languages, we're cascading it all around the world, 38,000 Restaurant Managers, our goal is to have each one of them develop a plan for taking people with you that will help them drive operational excellence in their restaurant.

I went to Irvine, California just a couple of weeks ago, and Greg Creed took me to this one store where we're developing our digital ordering system, a mobile ordering system. And I met this Restaurant General Manager and she took me back and took me through her plan that she was developing to take people with her to really handle the massive change that's going on as we think about how we're going to grow in our future.

This is very, very powerful stuff. It's stuff that you take this company that's big, you find the things that are really working, and you spread it like wildfire. And it really builds a great, great company. And it's the processes, and it's that capability that will ultimately get you the outcome, which want to have is of at least 10% same-store sales growth year after year after year and hopefully beat that. That's the outcome we want but we won't get there if we don't put the right processes in place, and the right culture in place to really make it happen. And that's what I see us doing. When I'm out in the marketplace, that's what we're focused on, that's what I see us doing, and that's what I think really differentiates us maybe from some other companies.

Now as we go forward, and you're going to see today, we are a growth company. In fact, we're an option-paying company. People in our company, we want options. Because we think that's how we're going to make more money because we're not a company where we don't have growth. And to a person, our leadership teams, we like that. We want to be -- we know we don't make a dime, okay? There's no performance that's going to make us a dime in any stock unless we grow our business and grow our stock that were aligned with you. But the reason why, we can say this, and we want this, and we're not trying to develop another kind of competition system is that we see all kinds of new unit growth. We wouldn't trade places with anybody in terms of our ability to build same-store sales growth, and we have very high returns. This is a company that should continue to grow year after year after year and we have the people to make it happen, the culture to make it happen, the brands to make it happen and you're going to see some great leaders today take you through the Yum! story, and we look forward to answering any questions that you may have.

With that, I'd like to introduce our Chief Financial Officer, Pat Grismer, who's done an excellent job of transitioning into the role that Rick Carucci, our President of Yum! Brands held. So, Pat, take it away, all right? Thank you very much.

Patrick Grismer

Thank you, David, and good morning, everyone. The theme of my talk today is driving double-digit growth year after year.

But before I get into the presentation, I'd like to share with you a few moments of inspiration that I've had in the 7 months that I've been Yum! CFO because this is my first time as Yum! CFO before this audience. And I'll start with a recent visit to Russia. Now the reason this was so meaningful to me personally is that as the CFO of YRI 2 years ago, I had the good fortune of working on the team that led the acquisition of this business and to return 2 years later, see 2-year same-store sales growth of over 60% was quite an inspiration and very exciting when you consider what our team has done to completely reface this business and not just in terms of the assets, as you see here in this before-and-after image, that's the same restaurant, by the way, taken from the same angle.

But they have refaced the menu, the advertising, the leadership team, the service. It has been an extraordinary story, and it's an inspiration to me of just how powerful our company is and what we're capable of doing.

The next moment for me was on a trip to India, where I had the opportunity to witness David recognize our very first specially-abled shift supervisor. Now when we say specially-abled, we're talking about team members who are speech and hearing impaired. And the Yum! India team has done a fantastic job of creating career opportunities for these very special people.

And it was a unique moment when after David recognized this shift supervisor, his team, his specially-abled team, recognized him in sign language and it was a moving time for all of us there to witness that and a great demonstration of our huge heart culture.

The final bit of inspiration for me, also in India, on a return visit, this is just last month, I had the opportunity to meet one of our outstanding customer maniacs in one of our restaurants, one of our great brand ambassadors who is so enthusiastic about the KFC brand that he had the logo painted on the back of his head. Now you may wonder why, why would this be such a source of inspiration to me. Well, the fact is, this tailormade for me, right? And I tell you, I'm going to be rocking the Yum! logo on the back of my head when Yum! stock hits $100, and I assure you that it will in the coming years. And my team has reminded me that, that commitment must apply on a split adjusted basis and it will.

So let's get down to business. There are 4 key messages I want to reinforce for you today. The first is that 2012 was an absolutely outstanding year for Yum! Brands. The second is that we are a high return cash machine. Third, our growth model is durable. And fourth, 2013 will be another year that we deliver double-digit growth.

Now as context for our performance in 2012, I'd first like to remind you of our ongoing earnings growth model. We have a portfolio of businesses that collectively models 13% growth in earnings per share before special items. That gives us the confidence to commit consistently to deliver at least 10% earnings per share growth. Now why is this important? Well, it's important because it gives us the flexibility to make investments behind future growth engines. It also allows us to maintain that message of consistency because that's something that's very unique about Yum! Brands and something that we know our shareholders appreciate.

So how did this play out for us in 2012? Well, there are 2 things I'd like to highlight for you. The first is the quality of our growth, and then the second is the power of our portfolio. In terms of quality, we had all 3 of our major divisions, China, YRI and the U.S., deliver double-digit operating profit growth.

And as a consequence, we got 14 points of EPS growth from our operations, which is fantastic quality and something we're very proud. At the same time, as we know, we had outperformance in YRI and the U.S., which have to offset the fact that we had slightly less-than-expected performance out of our China division. A great performance overall, but a bit less than what we normally expect.

That's the power of Yum!'s portfolio and again, that's what enables us to deliver that consistency of at least 10% earnings per share growth.

Building on the theme of consistency, one of the things that contributes to that is our franchise business model. And as David mentioned, this year, we'll reach $1.8 billion in pretax royalties. And that provides us a certain instability to our income.

The other great thing is that, that helps to underpin even higher growth in operating cash flow, and actually, I love the way these charts build. In fact, if we can go back, I want to see it build again.

I mean, it looks like a juggernaut, and that's what it is. It's a juggernaut of cash for us. This year, we'll hit $3 billion in operating cash flow. Of course, that prompts the logical question, what do you do with all that cash? Well, I can assure you that we are very disciplined in the way that we deploy our cash.

And it all starts with investing behind future growth, whether it's high returns, new units or as was the case this year, we had a unique opportunity with [indiscernible] to add a concept to our portfolio that we're confident is going to be a big growth engine for our China Division in the future. So the first priority is investing behind the growth, to keep that growth going.

Next, we pay a meaningful dividend. I think as you are aware, we target 1.5% to 2% yield, which we think is very competitive when you consider the growth profile of our company. And then our remaining cash, we return to our shareholders in the form of value-creating share repurchases, given the share price appreciation that we've experienced over the years.

Very disciplined cash deployment. So let's talk a little bit more about investment.

Our investment is increasingly skewed to high-growth markets. And here, you can see this year, our $1.1 billion of capital expenditures, 81% of it going into international businesses and contrast that with where we were 5 years ago.

We are moving our money, our new investment money into the high-growth markets, where we get the higher returns and a faster growth.

This is complemented by a very deliberate ownership strategy. And what I mean by that is that through a combination of refranchising new company equity stakes like Russia and Africa last year and continued development of company-operated restaurants in high-growth, high-return markets, we are shifting our ownership to the emerging markets. What's interesting to me about the chart on the right, 2012, when you look at 68% of our company ownership being in emerging markets, it's nearly the inverse of where we were 5 years ago, and this is no accident.

There has been a very deliberate plan by Yum! Brands to achieve this result to strengthen the growth of our company.

When you combine the disciplined investment with the ownership strategy, what you get is a company that is a leader in ROIC, this year achieving 22%, and you can see this track record of improvement, which is quite impressive.

And what that does, and our shareholders are certainly happy to hear this, is drive growth in shareholder cash returns, both dividends and share repurchases. This year, we increased our dividend rate by 18%, and it was the eighth consecutive year that we have increased our dividend in double-digit terms.

And then on top of that, we paid about -- or we are going to pay about $900 million back in share repurchases, thereby delivering to our shareholders $1.4 billion of cash returns in 2012.

And I have to point out that we get even stronger from here because our profits are increasingly sourced from high-growth markets. And this goes along with what I talked about in terms of ownership and where we're deploying our capital. This all builds up to a model where you can see the profit shifting with an increasing percentage of our profits sourced from these high-growth markets. 2012, 60%. This gives us, what I call, a durable growth model. And what I mean by that is one that can sustain double-digit growth for years even though the base gets bigger and bigger. So I'd like to talk about our ongoing growth model and in particular, how we see it playing out in 2013.

As you know, for several years, the basic construct of our model has been China, 15%; YRI, 10%; and the U.S. at 5%.

So we'll start with China. And as all of you know, and as David reinforced, it has been a phenomenal success. Look at this, system sales doubling in 3 years. I don't know of many scale businesses. I'm talking scale businesses that double in size in a 3-year period and our China business has done just that.

But of course, system sales is composed of 2 key elements: Same-store sales and new unit development. And so I'll talk about each one of those in turn. We'll start with same-store sales growth.

This chart shows what we've delivered by way of same-store sales growth in each of the years since we separated out China as a stand-alone division. And what you can see is that over that period of time, we've averaged 7%. And bear in mind, we have done this over a period that we have dramatically added new units to our China Division at the same time, experiencing some turbulence along the way. And so yes, you will see variability from year-to-year and of course, you'll see even more volatility from quarter-to-quarter, as we've just reported with our fourth quarter.

And to reinforce the point that David made earlier, that was simply a matter of our having overestimated our ability to sustain the same-store sales growth, lapping the extraordinary 21% from last year. But when we look back, and we see a 2-year same-store sales index of 17%, I can tell you we feel very proud of that. We think that's a fantastic accomplishment, particularly given breakthrough increase in new unit development.

As we look to 2013, we're excited about the strength of our brand positions. We're very excited about the power of our marketing plans for next year, you'll hear more from Angela Loh later. And as a consequence, we are targeting mid-single digits same-store sales growth for China Division in 2013. Now given where we're at today, as David mentioned, it's probably going to shape up to be a bit of a first half, second half story but we are targeting that mid-single-digit performance for next year.

So let's move to new unit development where again, the story has been very exciting for us. Consider that in 2011, we had a step change in the pace of new unit development, moving from an average of about 500 to over 650, a step-up of 150 units. Well if that wasn't enough, the team took it up another 150, and this year, we will open more than 800 units, which again, is an amazing accomplishment and speaks to the capability of our team, something that is unmatched by anyone else in China.

And what that does is put us in a good position to drive double-digit growth in China next year as well.

Now as has been the case for us in China over the years, as we've built now more than 5,000 units, we reflect on the results we're getting from those units, and we're proud of the results we're getting. Still, at under 3 years cash payback.

But there are some things we've taken note of that have influenced our development strategy going forward. And the first is that in Tier 1 cities with our KFC concept, we've come under some margin pressure. And what I mean by that is that rents and wage rates have increased and put pressure on margins and therefore, put pressure on returns. Now our returns in Tier 1 cities with KFC, they're not 3-year payback, they're probably closer to 4 years. But I will take a 4-year cash payback in China everyday of the week because we're creating enormous shareholder value with each one of those restaurants that we open.

However, based on what we've observed, we are taking a more considered approach to our Tier 1 development. We are being more selective with our sites. The goal is to maintain our competitive advantage, not to widen our leads but to maintain that strong competitive advantage with KFC in Tier 1 cities.

Shifting to lower tier cities. We've seen great results with all of our concepts. And for the Pizza Hut dine-in concept specifically, we've seen fantastic results across every tier. So we are accelerating. We're accelerating the pace of development in lower tier cities and broadly, with our Pizza Hut dine-in concept. So you add these 2 things together and what we have still is a very substantial development program but a shift in the composition of our new units.

I am confident in the strength of China's growth model. It is led by development, which we'll sustain at a double-digit rate in terms of units. We will continue our track record of success with asset leverage, introducing new sales layers and driving product innovation. And we will continue to enjoy very high returns in our investment with cash paybacks continuing to be under 3 years.

And this is our formula for success in China, and that's why our China Division is unquestionably the #1 retail opportunity in the world with a portfolio of brands that is the envy of the industry.

So now I'll shift to YRI, which again, can count on development as being it's #1 driver of growth. And one of the reasons that's so exciting is that this is a driver that is getting even stronger. We saw the step change in China Division's new unit development, we'll take a look at YRI. You look at 2009, 2010, 2011, we averaged 800 units a year and look what has happened in 2012. The team has upped the ante. With extraordinary capability around the world, they've taken that up by 150 units, and we see that getting stronger from here.

Of course, what's fueling that is the unparalleled footprint that we have in emerging markets where, in many cases, we are the market leader and by a wide margin. And as a result of that, we've seen dramatic shift in the composition of our profits from YRI. Back in 2009, I was the CFO at YRI, we earned about $0.5 billion. You can see that we were sourcing about 40% of our profit from emerging markets. And you can see how that has continued, how it has shifted, were now half of our profits in YRI come from emerging markets. And that trend will continue. And again, that's great news for YRI because it contributes to what I described as that durability of the growth model. The base gets larger, the composition changes, we sustained a very high rate of growth.

India. You'll hear later from Niren, this year, we separated India out from YRI, we established it as a stand-alone division. We wanted to bring more visibility to what we consider to be the next big growth engine within Yum! The division is not contributing meaningfully to profits or growth today but we see that changing in the next 2 to 3 years. And that's bolstered by the fact that when we looked over the last 5 years, what we've seen is that system sales has more than tripled, and we've built the capability to construct at least 100 new units per year. That's what we'll achieve this year, and that number will get even bigger going forward. And so that raises our level of confidence that this is going to deliver the growth that we talked about in years past.

Moving to our U.S. Division. I think it's fair to characterize 2012 as a turnaround year. I wouldn't say that we're going to sustain these results every single year going forward, but this was a breakthrough year because every single one of our brands, Taco Bell, Pizza Hut and KFC drove same-store sales growth and achieved margin improvement and drove spectacular improvement in operating profit, 14% for what is arguably a mature business, 6% same-store sales growth, margin of 16%, really fantastic results. That gives us confidence that, that 5% goal that we have there is achievable and sustainable.

Why is it achievable and how can we sustain this? 2 reasons: Just last year, we moved into net unit growth territory. 2012, up 30 units on a net basis. I can't tell you the last time the U.S. was up on a net basis, and we see that improving to next year, and that is going to continue.

As David mentioned, we've strengthened our business models, our concepts on a much more solid footing and we see that continuing. Equally, in this next year, we will complete the restructuring that we talked back -- first in 2007, reshaping the ownership profile of this business. So we'll be down to 10%, and what that means is that franchise revenues will contribute more significantly to our profits in the U.S. going forward, and that is a more stable source of income. So with these 2 things combined, we see a path to more consistent growth, achieving that 5% growth for our U.S. business on a sustainable basis.

So what then is the early look for 2013? At least, 700 new units in China. Now one thing I need to point out here, this is the highest guidance we have ever provided in terms of China unit development. That gives you a sense for how confident we are in the model that we have and our ability to continue to grow it. As I mentioned, that growth will be shifting to the expanding lower tier cities.

YRI. Robust new unit development continuing the trend that we've seen this year and sales momentum in our emerging markets.

India. We expect 150 new units in 2013, and we will reach an inflection point of growth. As I said, in the next 2 or 3 years, watch for India to contribute meaningfully to Yum!'s profits and to our growth in EPS.

And then finally, U.S.. Improved competitive positions and in net unit growth territory. So more consistent growth out of the U.S.. Now in any given year, there will be tailwinds, there will be headwinds, and I'll share with you just a few here.

Starting with the tailwinds. International development, I talked about. And as David mentioned and as Tim mentioned as well, so much of next year's growth is also already in the ground with all the units we've built this year. And we have just as many in the pipeline. So that growth plan is already there, and that gives us a lot of confidence that we're going to have that tailwind to achieve our -- at least 10%.

Emerging markets and U.S. sales momentum also is going to help, as will supply-chain efficiencies. You may recall, we've talked in the past about the initiatives underway in the U.S. to attack supply chain in a way that allows us to deliver even better value to our customers. That will continue, and that will be helpful to our margins and our sales, ultimately. And then the 2012 share repurchases that will complete this year, obviously, gives us a nice head start on driving earnings per share growth in 2013.

What are the headwinds? We've talked about where we are at with sales, China, currently. So we're going to have a slow start to the year in China. It is shaping up to be a first half, second half year for us. U.S. refranchising creating huge shareholder value, contributing significantly to the improvement in our ROIC but nonetheless, in 2013, will be dilutive to our operating profits, and that will take about 2 points of operating profit growth off our U.S. business. But that's working in our plans, and it's creating value for our shareholders.

Global commodities. This will not come as a surprise to anybody. Certainly, it's a big issue here in U.S. as a consequence of the midwest drought in the summer, we're feeling some effects of that around the world. However, through a combination of the supply chain efficiencies I talked about, plus other productivity initiatives and a responsible level of pricing to protect our value position, we're confident that we can manage that.

And then finally, our tax rate will increase again in 2013 over 2012 as it did this year over 2011, that's working in our plan.

So looking further out into the future, how do we see this playing out? And you'll recall from last year, Rick Carucci stood up here in New York and shared with you his vision for sustaining at least 10% growth through 2020. I share Rick's vision. Now the way that we get there, clearly, is going to change, right? And let's start with China Division. You'll recall our previous model called for 7 points of growth coming from China. That's now 5 to 6. Now that does not mean that the growth potential of China is diminished in any way. It does not mean that we see returns falling on our investments in China. It's simply a function of China getting to be a whole lot bigger and with the bigger base, you're going to grow a little bit more slowly. So that's that effect, but the great news is that we have outstanding growth engines in India and in other emerging markets that are in YRI. They're going to pick up the slack, so to speak. And so we're going to -- we have the modeled growth that gets us to 13%, earnings per share growth, which gives us the confidence to say at least 10% growth through 2020.

And so with that, I can tell you that building on this extraordinary track record of success, we will deliver at least 10% earnings per share growth in 2013. That's a durable growth model, and that's exactly what I mean by driving double-digit growth year after year.

Thank you. And we will now break for 15 minutes. So it is now 5 after 10. So at 10:20, we'll reconvene. Thank you very much.


David C. Novak

If we can get back to our seats, we'd like to get started again. Okay, if we could -- everybody could take their seats, we'll get started again.

Next session, I have an opportunity to see a number of our outstanding leaders as they take you through the Yum! story in more detail.

We're going to start with China. Just one thing about China just in our businesses -- in our company, we talk about the importance to set in the word picture and get people to imagine what can be.

And when we look at China, I always had thought about China in terms of what McDonald's has done here in the United States. One of the things I admire about McDonald's is that in this country, with the population base we have here, they really well -- they penetrate it well in 14,000 restaurants or close to that. But everywhere you go, in the United States, you see McDonald's in A locations. And in particular, I mean, I grew up in small town America, and really small towns, and my dad worked for the government, so we traveled from city to city or small town to small town. But if you went to Chillicothe, Missouri, you'd find that McDonald in the best location in Chillicothe, Missouri, or if there's a quick-service restaurant in Chama, New Mexico, you'd see a McDonald there. But if you go to small town America, towns of 10,000 to 20,000, the county seats of America, there's always a McDonald's in the best location everywhere. And they have done a fantastic job. In fact, in every city that you go to, you'll see McDonald's in the best location everywhere. And their locations and their first-mover advantage has given them an incredible competitive advantage for the long term.

And as we see developing China, as we move into all these cities that you'll learn in more about as the next presenters come up, we see -- that's what we're doing in China. We're getting the best locations. We're first in, and we're going to have that presence in China that has made McDonald's inarguably, by far and away, the #1 QSR chain here in the United States.

So that's kind of the word picture that we paint for China and what we're doing. And obviously, we're able to do this with a great, great financial model.

What I'd like to do now is introduce Weiwei Chen, who's our new CFO from China. Weiwei has really learned our business quickly and is already adding a lot of value. And she's going to take you through the development. And then Angela Loh, our Chief Concept Officer, is going to take through how we continue to develop our brands.

So Weiwei? Let's give a welcome to Weiwei. Okay? Thank you.

Weiwei Chen

Thank you, David, again. Good morning, everyone. Thank you. It's great to have this opportunity here to share with you our development activities in China. But I think it's more important to share with you tremendous development opportunities that we work very hard everyday on and that we capitalize on.

We have come a long way since our first KFC store in Tiananmen Square. Over the past 25 years, we witnessed and capitalized on China's strong growth in GDP, urbanization, household income and building infrastructure, all of which will continue. To us, we're only on the ground floor of China development opportunity.

These charts are one of the biggest reasons I joined Yum!. I was impressed by the growth trajectory. I was even more impressed by the scale. And I've been back working in China for 13 years, and I can tell you, many multinational companies would love to have $1 billion as their revenue line for their China business.

Our success has come from an unprecedented China opportunity. More importantly, it's a result of our early entry, our ability to adapt our business model to the Chinese market, our ability that has -- our capability that has been developed and strengthened over past 25 years, our discipline in our development process and our world-class supply chain distribution system that allows us to go anywhere in China.

After running double-digit growth for over a decade, we start to see China GDP moderating. We all know that the past strong growth was largely supported by export and investment, yet we expect, per the government’s plans, that consumption will play an ever-greater role in continued economic growth, which can only help our business. A 7.5 GDP growth is still robust and would be hard to match anywhere else.

The recently concluded 18th Communist Party Congress not only unveiled once in a decade power change, but also laid out growth targets for new leadership. The party aims to double the country's GDP -- to double country's 2010 GDP by year 2020. This translates into a roughly 7% real GDP growth per annum.

It will be hard to find another economy in the world to match this growth target. More importantly, the Chinese government has credibility in delivering their plans.

Also at the 18th Party Congress, the leadership pledged to double per capita income for both rural and urban residents this decade. This is the first time ever inclusion of a per capita income growth target in the party's ruling history, underlying party's commitment to share more benefits of economic development with those at the lower end of income spectrum.

For those of you who are not familiar with China's hukou system, it is a household registration system that ties an individual to a specific locality at birth. The systems regulates internal migration, especially from rural to urban areas, where an individual is entitled to better public services and social benefits. We formed the second [indiscernible] system will enable 250 million migrant populations, who today is working in urban areas without resident status to enjoy low-cost housing, free education for their children better employment opportunities and social benefits.

Coupled with their income growth prospects and already high savings, this will ultimately lead to higher consumption growth for this very large group. These urbanization income growth trend will help millions -- more Chinese consumer with more money to spend, a very favorable trend Yum! can capitalize on.

Chinese cities are on the rise. The Chinese government's 2010 to 2015 5-year plan targets to create over 20 new city clusters. This plan will further strengthen industry development, public service, employment growth in medium and small cities and towns. The government's continued investments in new rail projects will create transport links between and within these city centers, and will generate positive little effect to transport trade and development.

Similarly, the government has been pushing for shopping malls and hypermarket development, so that the growing urban population will spend more in a concentrated retail environment, thereby helping to rebalance the Chinese economy towards private consumption, which will become a much bigger contributor to GDP growth than it was ever before.

Today, China has a consuming class of over 300 million population. With the increase in urbanization and income, we expect this class to double by 2020. This rapid growth, coupled with a strong brand, will help Yum! China to reach significant benefits for many years to come.

I want to pause here to give you some background on Yum! city tier definition as the later slides, I'll talk about our development plans in these tiers. We classify China into Tier 1 to 6 cities, based largely on affordability to our brands and size of our -- of population. In our current mapping, we capture around 2,300 cities, and the pool is growing due to the increase in urbanization and income.

From Tier 1 sitting in the famous regional political and capital centers like Shanghai and Beijing to Tier 5 and 6 being county level cities and townships, that were rural areas not long ago. Such growth roadmap carefully plays to the strength of Yum! China because our strong restaurant brands are present in over 800 cities today. This enable us to reach significant first-mover advantages.

Our leading brand, KFC, maintains leading position across cities both large and small. In fact, our dominance is most pronounced in Tier 3 and below cities. Where we see -- while we do see increased cost pressure in top tiers and coastal areas, we're pleased to be able to expand our presence in land and in lower tiers, where rent and labor costs are low by comparison.

We are in a unique and enviable position, not just with KFC, but also with our Pizza Hut brands. This chart shows you that our Pizza Hut brand footprint from operating exclusively in top tiers 10 years ago to today with over 1/4 of our next restaurants in lower tiers where little competition exists. With 22 years of continued capability building, we're happy to announce that Pizza Hut is now the leading developer in casual dining, but also likely to go same number of units as McDonald's this year.

Going into lower tiers not only gives us tremendous first-mover advantage, but also provides us better unit economics. As you can see from the chart, both KFC and Pizza Hut brands enjoy favorable cost structure and fantastic cash-on-cash returns. Compared to KFC, Pizza Hut commands even better cash margins, benefited by a wide variety of offering with a favorable cost structure. I want to highlight that these numbers also apply to new entry cities, where we open our first KFC or Pizza Hut.

This results not only shows the strength our brands but also demonstrates that mainstream Chinese consumers in lower tiers are ready both with their palettes and their wallets when we get there.

For the past 2 decades, consumers in large cities have to drive double-digit annual retail growth. Today, we see the phenomena of Tier 5 and 6 consumption growth outpacing their top-tier counterparts. This population of more than 200 million consumers in lower tier county towns and cities is increasingly willing to spend more on foreign brands that have perceived higher quality. As a result, we increased developments of shop -- as a result, we see increased development of shopping malls, supermarkets and other retailers in these locality.

This trend that have helped us -- our entrance into the cities. In fact, we have significantly accelerated our pace in the past 12 months to ensure that we capture this fast-developing trend. We were able to do this through our operating capability already on the ground and Yum! distribution system that is capable of supplying any new restaurants anywhere we go.

Catering to the changing consumer lifestyle and requirements for convenience, we also work to adjusting our brands and business models. We created the delivery, drive-thru and 24-hour services. We are opening more stores and transport size to capture the infrastructure development and movement of traffic. We have been -- we have also partnered with a number of large retail developers and operators, moving with them into new trade zones. All the above for us, what you see is new opportunities in the ever-changing market.

We have been able to make significant progress over the past decade in opening new restaurants. 2012 will be another record year, lapping 2011 record of 656 units, where we will open at least 800 new units with 300 asset upgrades on top.

This year's achievement will not be made possible without our strong development capability. We have a strong and growing team of over 1,000 development professionals, having a wide coverage of more than 1,000 cities. The team is well-equipped with expensive training and tools that were developed in-house. We have advanced know-how and rich data that are not easily replicable by our competitor.

Furthermore, we have a vigorous investment decision-making process that have representations from brands and support functions like finance at both regional and headquarters levels.

Our rigor in investment decision is also followed by our performance monitoring process, whereby new performance -- new unit performances are tracked on a monthly basis.

Though 2012 is another banner year for Yum! China in terms of new store openings, we observed some trends, and that require new thinking and adjustments.

Top tier city margins are challenged by continued increase in rental and labor costs, more prevalent in city centers. In contrast, stores in lower tiers enjoy fantastic returns due to more favorable cost structure and more important, the consumers' enthusiasm for our brands.

The right-hand side chart show you the number of Yum! restaurant per million population. Top tiers' penetration is still low compared to U.S. benchmark of 60 units per million people. Lower tiers are significantly underserved by the traffic -- by trusted brands like KFC and Pizza Hut, which is a tremendous opportunity to our future development.

As mentioned earlier, we see some deterioration of top tier margins due to higher cost structure, particularly in city centers. Nonetheless, we continue to generate positive cash returns and create shareholder value.

Due to margin deterioration in top tiers, we will be more selective in our pace of expansion in these areas. To fully leverage better economics, we will continue our rapid expansion into new cities and lower tiers. We are also accelerating Pizza Hut new units that command better margin and see lower competition.

To summarize, China represents unmatched developmental opportunities to our business both today and long term. With our strong development capability, we expect to take our brands to the far reaches of China, leverage our deep know-how of the market and trade zones, strong execution capability and discipline, a large pipeline of RGMs who are ready to run when new units open and a wide supply chain and distribution network, which Yum! controls.

As the industry leader, Yum! remains committed to grow our brands in the China market even in volatile times. As we believe that the country is on the strong growth path, particularly within expanding consuming class.

We are able to create shareholder value through continued execution, adaptation of China development strategies. A quarter century later, after our first KFC store in Beijing, we believe we're still on the ground floor of opportunities.

Now I turn it over to Angela Loh, our Chief Concept Officer, to talk to you about exciting brand strategies. Thank you.

Angela Loh

Good morning, everyone. It's a pleasure to be back in New York again and have the opportunity to share the Yum! China business progress with you.

As you all know, one of Yum!'s important global strategies to build leading brands in every single category in China. Currently, we are operating 5 branch in China, and we are very proud that 2 of them are definitely well-positioned as the leading powerhouse in their respective categories. Our other brands also have great long-term potential to -- for our business, and aiming to be the leaders in 3 significant categories in China.

In the last 10 years, our system sales has grown from $1 billion to more than USD 8 billion this year, both KFC and Pizza Hut dine business are differently the growth engines for our business in China.

So let me first start to update you on KFC. Our vision has been to build KFC to be the -- to be rooted in China. Let's first take a look at the next activities we have shown in China, which demonstrate how KFC brand is truly a part of Chinese consumers' life.


Angela Loh

In order to deliver our vision, we are committed to showcase the brand for all consumer age groups, all dayparts and all eating locations. We work around-the-clock to ensure our category leadership and product innovation for lunch, for dinner, for deliveries and much, much more.

Besides building brands, we have product in dayparts. We also need to make sure that our restaurants are close to consumers' everyday life. Just this September, we opened KFC's 4,000th store in Dalian, a city in the Northeast of China.

In addition to our new unit milestone, KFC also launched rice to be another new sales layer to better satisfy Chinese consumers' mainstream needs. We know Chinese consumer would love to have rice to go with our delicious chicken instead of bread or potato.

In 2012, we continue to build our value image through our working day value launch program. This program help us to further strengthen our competitive position.

There's another major initiative early this year. We signed on NBA player, Jeremy Lin, to be the spokesperson of our teenagers 3-on-3 grassroots basketball program. We know not all Chinese may be a fan of New York -- a New York Knicks fan or a Houston Rocket fan. But we know they will all be Jeremy Lin fans. With Jeremy's endorsement, we are -- we can further strengthen our brand to -- our brand position on promoting balanced eating and regular exercise.

In 2012, we have achieved sales growth from all dayparts and our new business channels regularly. We are very excited about how we can leverage our assets in all fronts. With all those efforts, KFC has further widened the gap on store penetration versus our closest competition, McDonald's. And also we have achieved significant win on all consumer metrics.

The chart you see on the screen is a very disciplined tracking process that we do on a monthly basis. We interviewed more than 1,500 consumers in China, more than 50 cities. This tracking system help us to better understand our consumer and also help us to be see where the brand stands on consumers' regard.

If you look at the tracking results, KFC leads in nearly every category. From chicken experts, great tasting food, great taste -- great varieties, to that choice of dayparts and delivery service. Two years ago, we were behind McDonald's on value. With the effort which were behind value program, we are now on par with our competition. With no doubt, KFC is definitely the #1 western QSR brand in China, and we are the most preferred QSR brand in China.

Moving to 2013, we are very excited about our pipeline of new news. We will continue to strengthen our rice and a sandwich sales layers with premium rice and premium sandwich product innovation. We also have an exciting pipeline for our dayparts: Breakfast and dinner. We will further strengthen our value position with new products and new promotion programs. Last but not least, we will continue to capture the new business opportunities, including KFC deliveries, plus drink and dessert kiosks. We are very confident with this new news across our KFC brand, will lead us to another strong year.

Now let's move to China's casual dining powerhouse: Pizza Hut Dine-In. When David visited us, China in October for our annual business review, he said, "Pizza Hut Dine-In growth in China is Yum!'s single biggest success in the last 3 years." Why did David say that? Because first, the team has built Pizza Hut into a product innovation machine. The brand is well-positioned at pizza and more.

Our average unit volume sales has grown from USD 1.4 million to USD 1.8 million. And our new unit returns are even stronger than KFC. Actually, we are defining the casual dining category in China.

Pizza and more, simply means we are not just pizza experts. We are the #1 casual dining brand that provides Chinese consumer a complete western casual dining experience. We serve delicious appetizers, soups, salads, and proteins, rice, pasta and great-tasting drink and dessert. In 2012, we made great progress on our signature brand-building program. Again, we changed at least 25% of our whole menus twice a year. We're offering powerful varieties, which make it very difficult for any competition to follow.

Then we promote everyday 2 items at half-price campaign. This campaign help us to build signature products and also to keep our value image.

Finally, we continue to build afternoon tea program to fully leverage our beautiful assets. We are very happy to see that afternoon day parts now contribute more than 20% of our store level sales.

This year, Pizza Hut Dine-In business will surpass USD 1 billion in sales in China. Like KFC, we are take able to take this brand to all 30 provinces in China, except Tibet. We have over 725 stores in more than 160 cities. We are confident you won't be too long for us to reach 1,000 Pizza Hut Dining restaurants in China.

If we look at the brand-tracking results for Pizza Hut, pizza dining is yet another trend with broad shoulders. With our close competitor right now, the benchmark depends on what brand measure -- brand element we measure. Pizza Hut is the significant winning over Papa John's in full taste, varieties, best pizza, best pasta, proteins.

In day parts, the afternoon snack and desserts, we compete very well with Starbucks. Customers just love our afternoon free drink refill program. On the value front, at value for money, Pizza Hut has even higher score than QSR like KFC. We are very out of the overall brand strength that we have with Pizza Hut Dine-In business.

2013 will be another breakthrough year for Pizza Hut Dine-In business. We will continue our menu revamp, value effort to further strengthen the brand. The big news will be the sizzling stone pan steak product that we're going to launch nationally. The sizzling stone pan steak product is great -- has achieved great sales performance in the test market, and we are confident this going to be another significant sales layer for our business in China.

We are also testing breakfast day part and get prepared for our future business opportunities. We are excited that Pizza Hut Dine-In is going to have another strong year by fully leveraging our assets and also serving great menus with great values.

Before I closing the Pizza Hut Dine-In parts, I would like to share with you the sizzling steak commercial that we had used for our test market launch.


Angela Loh

Hope you are hungry now. Besides the exciting plan we have for the 2 big brands in China, we are equally excited about our other 3 brands for the future.

If you can read Chinese, then you will realize that Pizza Hut delivery Chinese brand names does not say anything about pizza. The 5 Chinese characters directly translate as must wing home fast delivery. So the Chinese consumer understands that we want to build the brand to be a total food delivery solution, delivering both Western and Chinese options. We want to build the brand to be the #1 in the food delivery business, not just pizza delivery.

With the continuous effort on this strategy, our non-pizza category now contributes 50% of our sales, and the brand is very relevant to the Chinese consumers' needs on the delivery occasions.

With the strong sales and margin performance, Pizza Hut delivery is now ready for growth as we expand to many more new cities in China next year.

While Chinese QSR brand in earning, we stay confident that this -- the brand should have the biggest opportunity in China because Chinese consumer will always eat more Chinese food than Western food. The unit volume sales is encouraging, and we will work out the operation details over time.

In 2013, we will further leverage KFC's brand strength and test new stores in the lower tier cities. We will explore different models to further expand the brand.

Last but not least, the newest member of the family: Lushi brand. Hotpot is a large and mainstream category in China, taking over the business early this year, the sales was soft. And we made a determined effort to ensure a strong integration, function by function. It has been a lot of very hard work, but we were very pleased with the results. And the sales has been stabilized in the last few months.

Today, we continue to leverage Yum!'s system to reengineer the back of house and the support models. They are all designed to position the brand for stronger growth in the future.

We are confident that leadership has a bright future ahead and is going to be a -- leading the Chinese casual dining hotpot category.

In summary, I hope you do see that we have lots of new news for all our brands. We have leading brands with strong brand equities. We have great product innovations in the pipeline. We have insight-driven value programs. We have new sales layers for both KFC and Pizza Hut. Most importantly, we have strong operating capabilities to support all our new initiatives.

With all that, I hope you are as confident as we are about our China business. As David always says, we are still at the ground floor of our China business. We will take this once in our lifetime opportunity to build leading brands in China in every significant category.

Thank you. So now let me introduce CEO of YRI, Micky Pant, to share more news with you. Thank you.

Muktesh Pant

Thank you. So you'll see, as we described, the runway for growth in YRI. We're using a few extra adjectives, and that's because of the vast geography in which we operate.

What we call YRI, I think most of you are familiar with, is every country of the world, except for the United States, China and India. And while it is true that the United States is the world's wealthiest country, and China and India are the world's most popular, if you put the 3 of them together, they still account for less than 40% of the world's population.

So what you see is colored sections here account for more than 4 billion people, almost 60% of the world's GDP, and that's where we operate. There's scarcely a significant country where you will not find KFC or Pizza Hut. We have about 15,000 restaurants at the moment across 120 countries. Taco Bell was launched more recently about 5 years ago, is already in more than 20 countries and is growing rapidly. We have a mix of equity and franchise, and I'll talk about that a little because that's critical to our business model.

And last, the most important, I think it was referred to by both Tim and by Pat, that the majority of our stores already are in emerging markets, and that's where the real growth is happening.

We had a meeting recently. In fact, the reason why we said long, long, long runway for growth was that we got together and tried to imagine how many restaurants we could realistically have in this division. And not directing into the future in terms of incomes and what's going to happen, but as we stand today, if we would take the consuming classes that exist across the world in this 4 billion population geography and the trade zones that already exist with infrastructure and availability, I'm not sure that we could have 50,000 restaurants as we spoke right now if the question was only building them and operating them, and that's the sort of potential that exists, which is why we are so bullish about our prospects going forward.

Now I'll make a few comments about our business model and then get to describing to you and share with you some of the excitement that people like me who travel around the world all the time see when we look at these countries and the way our stores are operating. But first is that we have a franchise led model. Even though we have several countries where we operate equity, well over 90% of the restaurants in YRI, so that's well over 90% of the 15,000 stores are actually owned and operated by franchisees who pays us an initial fee when they build a restaurant and then they pay us a royalty on an annual basis. This income stream is very, very predictable, and that's why we see steady growth, about 12% compounded in these fees. These -- the incomes are not dependent upon the -- on anything but the sales that we get out of these stores, which is why it would make it so safe.

The second is that emerging markets is where the growth is now. Colored in red here are the emerging markets where we operate, and the big one on the top right of course is Russia, the world's biggest country. Arguably, not a developing country in quite the sense of Africa and Latin America, in the sense it does have high levels of income but is still is emerging from years of socialism and it's showing the same characteristics that we're seeing elsewhere.

For the bulk of the world's population, other than that, little of you know in the south, below the 30th latitude, I guess, because that's [indiscernible], but that's where we see real growth in Latin America across Africa, the Middle East, large countries in Asia. And the consuming classes are growing there. And even though the last couple of years have been slow for the global economy, these countries are significantly outperforming the north and developed countries like the United States.

And all this has resulted, this combination of franchise commitment around the world and rising incomes in very good new unit development. Very pleased that this year, 2012, we expect to build about 950 new restaurants across YRI, which is significantly higher than the last few years. And we expect that trend to continue. So I think we can commit that next year, we will build 950 or more new restaurants. And the bulk of these, again, approximately 90% will be built by franchisees.

The sales momentum underlying this growth has also been strong. Our total system sales in 2012 expected to reach $17 billion, the vast majority of it through franchisees. The company sales contribution has diminished on a current -- of the sale of some equity in our high -- saturated or older markets. So we sold, as you know, very recently the Pizza Hut U.K. business. In the past, we've sold our interest in the Japanese business. And in general, we are investing more in high-growth opportunities, and I'll talk about this a little bit.

David Novak referred to this a little while ago, but just last week, we had a meeting of all our general managers. We have 15 business units around the world that control all these 100-plus countries. We met here in the City of New York, and we've made a few changes in the last 1 year. The first was that we started looking at emerging markets and developed markets separately. So we break up our meetings and the General Managers that run Latin America, Africa, Asia, et cetera, get together. And it turns out that their priorities and issues that they face are totally different from the ones that are faced by people who are operating in countries like Australia and Europe. And they're concerned very much with rapid rates of development, hiring new staff, value, local incomes are generally lower. Whereas people in developed countries are coping with, for example, pressures on the attrition, on availability of trade zones and operating stores where labor costs are extremely high, with relatively few people. And that's been quite a breakthrough. What we're going to do is to accelerate that method of working, and the developing market group are working increasingly closely with China. As David referred to already, we had a meeting in Shanghai. We are proposing to have even more. And the people like Angela Loh, who are the architect of the China business, are very helpful in educating our emerging market like Brazil and Russia and how to build more rapidly.

The other thing we did, which is the last bullet point on this slide, is that we decided that we will further decentralize. So we actually cut our headquarter's G&A very significantly. So if you were to come to our Dallas office where we run the operation on International business from, there's lots of room and plenty of space because we actually cut headcount in the center. We employed significantly more than that in terms of both dollars and individual headcounts in the field, so closer to the stores. And that also is paying us rich dividends. That's one of the reasons why we're seeing an accelerated rate of growth and new units.

All this has resulted in a fairly predictable and a comfortable sort of growth trend for YRI profitability. We expect to have operating profit of $700 million this year. And we say plus 10% compounded, that should be 10-plus percent, I guess. So 10% of better compounded annual growth rate in our operating profit contribution. So that was the broad sort of overview. We have 15,000 stores in over 100 countries, a decentralized operation. We operate all 3 brands. We have significant growth in our emerging markets, and 90% plus is led by franchisees.

Having said all of that, now let me give you a glimpse of what -- let me start with some countries. The first I'd like to speak about is the country of Thailand. Thailand is a very significant Asian country. It has a population of 67 million people. And in Thailand, we have, in fact, I think David Novak inaugurated our 500th restaurant not so long ago. We now have 515 restaurants in Thailand, as contrasted with 159 McDonald's, so about 3x the size. And now 2/3 of Thailand, we operate equity, so we actually run, own and operate these restaurants ourselves. We made good margins in Thailand, and it gives us the confidence that the business model is very robust. Learnings in Thailand are actually helping us in other franchise markets across Asia because we know and understand the business we have operated that actually run these stores, and it's giving us credibility with our other franchisees across the region.

The second country I want to mention is Indonesia. Indonesia is a large country. You're probably aware that it is the fourth-largest country in the world by population, with almost 250 million people, 250 million people and a progressive country and a stable and growing investor base as well. While it's a glass half-full, half-empty situation in Indonesia, the great news is that we have 680 restaurants in Indonesia, 680. And I checked this once again before coming here, but there are 122 McDonald's. So 1:6 in terms of ratio. Having said that, 680 with 250 million people, if you do the math, it's about 2 or 3 restaurants per million people, 2 or 3. In contrast, over the United States where we have, I think, rate about 50 or 60 restaurants per million people. There's no fundamental reason why Indonesia will not get there. The question is getting the operating capability and developing. So we feel very optimistic, and also that we are able to hold our own against competition very strongly in these emerging markets.

This next slide is actually the reason that cements our optimism even more, and that's the country of Malaysia. Malaysia was an early breakout country in Asia in terms of development, but it's not a rich country by any means when you contrast with United States or Western Europe. And it's smaller, relatively speaking, fewer than 30 million people in Malaysia, fewer than 30 million people and yet Yum! has got more than 800 restaurants operated by franchisee but more than 800 restaurants in Malaysia with less than 30 million people.

You see now Indonesia is 8x the size of Malaysia, 8x, they've got fewer restaurants than Malaysia does. The Malaysians, by the way, are extraordinary good operators. In fact, when Sam Su and Angela and others started up in China, they made the pilgrimage to Malaysia to see how they were doing it, and a lot of those lessons are applied across Asia. This gives us the confidence that we can go significant depth of penetration because if you take 800 stores with 30 million people, that's more like 30 stores per million people. About half the level of United States, and we believe we can do that in country after country.

And I think we are beginning to take Vietnam, started relatively recently. We took Jarden [ph], our franchisees in Hong Kong. We took our franchisees in Singapore, formed the consortium and entered the country, and operating extremely well in Vietnam. As we speak today, we have 140 restaurants, 140. Over 100 KFCs in prime locations like the store that you see here, entering now cities other than Saigon and Ho Chi Minh City. And it's in fact growing very rapidly. So I think we have built this year 30 or 40 stores, and the projections are even better. And the reason is that Vietnam has got over 90 million people, 92 million people in Vietnam. And very similar to Chinese population in terms of industriousness and ability to be able to work in groups and be productive.

The Vietnamese are very quality-conscious. You see increasingly made in Vietnam labels and clothing and other things here. And it's got all the characteristics that we saw in the countries like China or in Malaysia. They will develop rapidly. The best news of all for us at least is that although there are 140 restaurants in Yum! and over 100 KFCs, there is not a single McDonald, there is not a single Burger King and the closest -- there's not a single Domino's. The closest we come to in competition is Loteria out of Korea. So we have a very significant early lead in this very large country.

So Asia, in general, we feel good about the fact that in developing countries, we have operating capabilities, very good franchisees and early lead and in some markets like Malaysia, good levels of penetration, which only continue to expand as we go along.

Now moving across to the continent of Africa. I have operated personally in Africa for many, many years now, and I've seen businesses there for Unilever and other companies. And I've always believed that Africa will be the next powerhouse economy in the world. There's always hand strong by some terrible governance and a lot of conflict. But that is coming to pass. And also countries like China who are very far sighted amidst significant infrastructure investments in Africa, and we see that. I traveled to Africa and see there are hotels where only Chinese have spoken because all of the supervisory staff building their highways and building their dams and infrastructure live in these places. And Africa is coming to life. As a continent, it has got over 1 billion people. So Tim, another B for you. And Africa, if you take the continent of Africa from Egypt and Morocco down to South Africa, Yum! operates 1,000 stores already. So we have 1,000 stores, but the vast bulk of them, 724, are in South Africa.

In South Africa, we are absolutely dominant. It's not a very big country, South Africa, it is in area but in population less than 50 million people. 50 million people in South Africa, we operate 725 KFCs there. 725 KFCs, we have yet to launch Pizza Hut in South Africa. We have yet to launch Taco Bell in South Africa. We're planning to do both of these. But it in South Africa, with 724 KFCs, we are fairly dominant because there are only 159 McDonald's. By the way, we love it when McDonald's succeeds. There will be and great competitor and we love it when they develop the market along with ourselves, so I'm not bragging about the fact that we are bigger than them, but it's just a reality that in South Africa, if you were to travel, KFC is the dominant brand. Its pizza is regularly in the top 5 brands of the country, including all brands, not just in the fastfood industry.

What we've done now, as we reported to you the last, I think, time before last was that we bought some stores in South Africa, and we now own and operate these directly as equity stores. And that's given us an understanding of the African P&L, the knowledge of the business model. That is helping us to strengthen the business of our franchisees in South Africa. But most importantly, it is serving as a base, in which we can train new franchisees and new employees for opening up other African countries. So with the last 3 years, we've opened about 20 countries in Africa including the biggest ones, Nigeria, Kenya, Zambia, Zimbabwe in addition to areas of border South Africa, Lesotho and Swaziland in Namibia, et cetera. And here again, there is no competition inside at all. The constraint of development is only the availability of raw materials that we have busily engaged at the moment and developing chicken supplies, et cetera, but Africa is a very significant market for us.

The other encouraging one, I think, words have already been spoken about at, is Russia. The Rostik's acquisition has proven to be outstanding. We converted from Rostik's to KFC. You've seen the same-store sales growth of 60% over the last 2 years. Very capable team, we are building more and more stores at the moment. We have only 200 stores in South Africa. There are more than 300 McDonald's but we are already #2. We see good economics in this country, very good margins. We've investing capital just as soon as we can and we will build this out very rapidly. But Russia, remember, is 143 million people and it's a developed economy so expect a big business there.

Now the business where we have historically been weaker than fact has been in Europe, and it's a big challenge for us. If we take just 3 countries in Europe, which is France, Germany and Spain, France, and in Germany and Spain, these are more than 3,000 McDonald's, and we only have 300 of our restaurants, so it's underpin. We see that as a huge opportunity and the reason we do is because of the success in France.

France for us was a problem till about 6 or 7 years ago. We've been having extremely talented executive that put a stake in the ground and forced us to take the risk of building large stores, and we did this using the same playbook that McDonald's have used, business rentals. We loan money to good entrepreneurs and franchisees, and they build the stores. And several of them we own and operate ourselves. Now in France, we are seeing our highest unit volumes anywhere in the world. The average KFC does almost $60,000 a week to about $3 million a year. So about 3x our global average. And when we put up a KFC next to a McDonald's in the trade zone and the provinces of France, we're able to stand head-to-head with them and get very good sales and revenues. Many of you who have traveled to France will see that the product line is also very innovative. The French have been known for innovating on cuisine and they've added a lot to our pipeline across the world.

We have now started extending this success in the Germany, and I'm pleased to tell you that in Germany we've -- the recent equity freestanding drive-thru that we've built, we've inaugurated one recently in the city of Stuttgart and it did opening volumes very similar to the ones that they're getting in France.

In fact, across the country of Germany, we have higher transactions, higher traffic than we get even in France. And we are now extending this in Spain. So we've opened an office in Madrid, and we opened our first 2 drive-thrus in Madrid, and very good response again. And these 3 countries, as I said before, remember, have 3,000 McDonald's. So if you get even a small share of that, we will do very well indeed.

The last one is Central and Latin America. And I don't have the time to go into a lot of detail, but we have a sizable business. We have 1,800 restaurants across the region. Very strong in the Caribbean and in Central America. We are also strong in the northern part of Latin America, but the biggest weakness we have is in the powerhouse economy of Brazil. It's a continental economy. We have at the moment fewer than 100 restaurants, but we are determined to make a significant trust into Brazil. So we've hired a very talented general manager opening office in São Paulo, and we see that as a huge opportunity for going forward. The good news is our brands are received very well, so it will grow there.

In all these countries, the franchisees who are doing the bulk of our development are seeing very good returns. You see here data for Malaysia, Indonesia, Philippines, Russia and South Africa, all earning faster than 3-year cash payback. So that kind of economic return that tracks franchise gap will be readily, so we have no problems at all with that. And that's what gives us the confidence that from the $700 million that we're doing with operating profit in this year, that we will very rapidly and maybe a couple of years become $1 billion profit contributing division.

And even when that progress, we are still very much on the ground floor. I'd leave you with this one last slide, you remember as you all have heard that even with the growth that we've seen in the 950 stores debt we are building, we still got 2 restaurants per million people as contrasted with our ultimate goal of getting into the territory of 50 plus, so huge run rate for growth.

So that's what I had to say for YRI. I guess we'll be back up later for questions, but it gives me a great pleasure now to hand over to a good friend of mine, I just want to say a word about him, Niren Chaudhary, who I've known for a while. Niren is -- I'm from India myself. I grew up there, and he's just -- not just in our company but across the Indian landscape of companies operating in India, one of the finest executives that, that country has produced. So pleased that he is now in independent division and a great pleasure to hand over him here. Thank you.

Niren Chaudhary

Good morning. I appreciate the opportunity to give you an update on the India business today. So India has to be one of the most exciting and perhaps one of the biggest emerging market opportunities in the world. Over the next 10 years, it is estimated that India and China together would be a $10 trillion market, with at least $1 billion of fluent middle-class consumers. And half of those middle-class consumers would be in India. In fact, it is further forecasted that by 2030, India would have the largest consuming class in the world, ahead of the U.S. and China, and that is staggering.

Now this rapidly growing middle class has huge aspirations and dreams for a better future and a better tomorrow. And therefore, they'll be able to demand lots more accountability and transparency in governance and also a much deeper commitment to approve growth agenda. Therefore, after period of policy and action, we are once again seeing resurgence and much needed economic reforms in the country.

Now even the 2012 has been a rough year for India, and there's been a relative economic slowdown, given India's enormous demographic dividend, given the fact that India is one of the largest democracies in the world that independent judiciary, free press, India remains a tremendous opportunity for the future.

And within the context of this favorable macroeconomic environment, the eating-out market I have to say is a very exciting category to be in because it's growing very fast and it is relatively underpenetrated. It is estimated to be a $90 billion market, and less than 2% of that is organized with national and international food retail brands.

Thus, we are on the ground floor of the opportunity of a lifetime. And I really believe that with Yum! India, we are uniquely positioned to leverage this incredible opportunity. We have been in the market for the last 15 years. We've built world-class capability that has growth already. We have both equity participation as also well-capitalized and committed franchise partners, and we are in play with all of our brands.

These brands are in different stages of brand evolution, so we have KFC and Pizza Hut restaurants, which constitute our core. These are well established brands and the country to strengthen and grow them and then we have pizza delivery and Taco Bell that constitute exciting growth opportunities for the future that we are working against.

Now we are very intentional that we want to build iconic brands in every category in which we operate. And our brand strategy is being influenced by 3 key insights: The first insight is that with more than 600 million people under the age of 30, just think about that, 600 million people under the age of 30 and a median age of 28, India is the youngest country in the world by far. Therefore, India is all about the youth . And the youth demand more, the youth aspire more. And therefore, to be successful, our brands need to be aspirational in India.

The second insight is about the importance of value, particularly price point value, to deepen the accessibility of any brand. In fact, there are many interesting examples of price led innovations in India. So you'll have the 2.5 thousand dollar car or you have the $70 refrigerator or you have the $20 mobile phone or the $1 pizza. And all of these have successfully expanded the markets to penetrate price points. And therefore, to be successful, our brands need to be highly affordable.

And the third insight is based on Yum!'s success in China and the importance of broadening developments of our brands across deeper layers and channels as early on as possible and therefore, to be successful, we need to be innovative. So aspirational, affordable and highly innovative are the ways in which we are building our brands to be iconic in India. Let me now give you an update on where we are with each one of our brands, starting with KFC.

So KFC is going to be our main growth engine. And our ambition on KFC is really big. We want KFC to be relevant and accessible to anyone at any time, an aspirational brand, a mainstream brand. A brand that stands for much more than chicken, a brand that stands for great tasting, cravable food and beverage. In fact, we are building KFC as an aspirational brand in India across everything that we do. So we're building a dominant street presence with assets that have the clear look of the leader, bold, confident exteriors, one contemporary interiors, creating a third place where the youth in India can log out with their friends and their families and have moments of pleasure of a great-tasting cravable food and beverage. So I would like to share with you a recent TV commercial that captures the essence of what we want KFC to be in India.


Niren Chaudhary

I hope you enjoyed that. I'll take that as a yes. And we also continue to expand the relevance and deepen the accessibility of KFC in the market.

So far, we have established not only a very strong core business with chicken on the bone and sandwiches, but also successfully established some new sales layers. So for example, the branded beverage layer called Krushers, with its range of frozen beverages. And also the other grilled platform layer, with the launch of the fiery grilled chicken on the bone, a personal favorite of mine. And as the name suggests, fiery grilled, it is definitely not for the faint hearted. Now we have had the success on both Krushers and the other platform that is amongst the strongest that we have had in the world of Yum!, and we will continue to nurture these.

Go forward, our focus is in 3 specific areas. First, vegetarian, we want to expand the vegetarian variety that we have across all formats, and we see this as a very exciting platform to offer protein-based alternative to our consumers.

Next, value. We have developed a price point branded value layer called KFC Wow, which offers the great taste of KFC at wow prices. It's a collection of signature vegetarian and nonvegetarian products that we offer at penetrated price points of $0.50 to $1 that enables real customers to enter the world of KFC.

And thirdly, we're extending the concept to new day parts and channels, so we have begun the test with breakfast and are also in the process of rolling out delivery across our stores.

So we're building KFC as a built, big iconic brand that is aspirational, highly affordable and innovative.

And its strategy is working, and our results are beginning to now gain momentum. Over the last 4 years, our system sales have grown by a CAGR of approximately 60%, and we have also seen double-digit same-store sales growth over the same time period.

Our margins have improved by 12 points on the back of that sales leverage and also productivity activity improvements. Our business model looks very robust, with AUVs in excess of $1 million, cash margins of 21%, we are seeing average paybacks of about 3 years.

But what is even more encouraging is that we are seeing the success across assets and across markets. So what we're seeing is in line malls, food courts, drive-thrus, they're all working in mega cities, in growth cities and also in emerging towns. In fact, our model, if anything, is the strongest in the growth and emerging towns. And it is here where our development focus is going to be the strongest in the years to come.

So we are now the fastest-growing QSR brand in the country. And over the last 2 years, we have grown almost twice as fast as our nearest competitor. It is projected that we will have approximately 240 stores in 50 cities by the end of 2012, and we now have the supply chain infrastructure and the people capability in place to rapidly expand to the next round of 50 cities with equity and franchise participations and grow to more than or at least 500 stores by 2015 and become the #1 QSR brand in the country. So very excited about the prospects of KFC and the results that we're getting.

Next, an update on another powerhouse brand, Pizza Hut. Pizza Hut has been rated as being India's most trusted food retail brand for the last several years. It is a brand that enjoys enormous equity and regard in the market. We started 15 years ago, we've done a restaurant-based delivery concept, but then realizing the immense potential of both of these channels individually, which is restaurants and delivery, we decided to sharpen our focus even further.

And 4 years ago, we have now started building 2 separate types of assets. We have the Pizza Hut restaurants, which have a larger format, casual dining stores, serving pizzas and much more. And then we have Pizza Hut delivery, which are country based, smaller format delivery stores. Pizza Hut restaurant is easily the market leader in the casual dining segment in India by far. And we continue to strengthen our leadership position by building assets that even are more contemporary and more aspirational for the future.

And we are expanding our menu to beyond pizzas with a compelling variety of food around plated meals, pastas, appetizers, beverages and desserts and the success of that strategy is visible by the fact that now almost 1/2 of what we sell today is more than pizza.

You saw earlier that Yum! China provides a very clear blueprint of success on the casual dining model. And even though our current model is solid, I believe that we still have a lot of upside as we continue to leverage China's learnings going further.

Let me share with you a TV commercial that captures the ambition that we have: Pizzas and much more.


Niren Chaudhary

So pizzas and much more at Pizza Hut restaurants. Onto Pizza Hut delivery, I think here again, we are on the ground floor of a huge opportunity, and Domino's success is a very clear endorsement of that fact. As you are well aware, it is estimated that Domino's has a market cap of approximately $1.5 billion and is growing at the rate of at least 100 stores per year.

And with Pizza Hut delivery, we have a unique opportunity -- can I just take that slide back? Thank you. And with Pizza Hut delivery, we have the unique opportunity to leverage the tremendous brand equity that we have in the dine-in business to establish ourselves as a credible challenger player in the near term by building country-based, delivery-focused restaurants.

Now to accelerate progress, we have entered with equity, and we believe this will help accelerate improvements on the business model and also ramp up the pace of development in the future.

Next, onto Taco Bell. I have to say, given the importance of value, vegetarian and youth in the country, Taco Bell could well be a bull's eye of an opportunity in India. Now we're still in very early stages, and we've built a few stores, and we are still in proof-of-concept mode but some of the recent trends are showing us signs of encouragement.

We've been working on strengthening the consumer proposition and making it attractive and relevant for the local consumers in 3 specific ways: first, we look at the global pantry for ideas that had an overwhelming chance of success in India. So given the Indian's preference and love for cooked bread, we picked on Chalupa, and the Chalupa has turned out to be a big hit in India.

Next, we developed a comprehensive range of vegetarian products across all the global formats that exist in Taco Bell. So think about this, we have potato and cottage cheese tacos and cottage cheese quesadillas and burritos and vegetarian crunch wraps. And that has worked very well as well. And the menu mix on the vegetarian food at Taco Bell is as high as 60%.

And where I'm most excited about is the third category where we are taking local inspiration to develop some fusion products that help the Indian consumers bridge their understanding of what Taco Bell is and how to use that food. So here's an example of one of my favorite products, it's called kotito, it sounds like a mouthful, kotito. But actually, it is a fusion product. It has a combination of the Indian bread on the outside called koti and on the inside, it has the good old international burrito fillings. So koti and burrito is kotito, a very outstanding product and one for which I would highly recommend that you make a trip to Bangalore. And if you take kotito on the way to Bangalore, I think the flight won't seem that long.

I love it, it's an outstanding product, so we're very excited about the food innovation that we're doing, leveraging our global pantry, creating a comprehensive vegetarian layer and then creating these fusion products to help bridge the understanding for the new consumers as to what Taco Bell might be and how they might use our food.

So at the back of all of this, we are seeing some encouraging results which are still way too early, early days. We're not where we need to be but we're excited. We're excited to take our tests to the next phase and see if this could indeed become a much bigger idea in the years to come.

Thus, in India, we are all in with all of our brands. So we have KFC, which is the fastest-growing QSR brand in the market. We have Pizza Hut restaurants, which is the most trusted food retail brand in the country and then we are working on strengthening Pizza Hut delivery and Taco Bell for the future.

I feel hugely confident in our ability to execute against this unique opportunity that we have, and the reason is because we have built an extremely solid foundation for operating excellence in the market in 2 ways: one, we have really built strong capability at the restaurant level. So all of our restaurant general managers are graduates in India and we have world-class rigor around their training and development. And we have also taken our winning culture and our principles of taking people with you, ABR training, How We Win Together principles and taken them all the way down to the front line. And it is my conviction that it is going to be at the strength in the back of our capability and our winning culture that we create a source of huge competitive advantage for us in the years to come.

Thus, I believe that we are in the right time, at the right place, with the right brands to do something truly extraordinary for Yum! in India. Our agenda is growth, and our goal is to have at least 1,000 restaurants, $1 billion in system sales, with all of our brands contributing by 2015.

Thank you very much. We are now invite my friend, Greg Creed to present Taco Bell.

Greg Creed

So thank you and good morning, everybody. I think I stood about a year ago in front of most of you and outlined a plan that I said would do 2 things: one, we would reconnect our customers with our brand; and we would reaccelerate our same-store sales growth back into numbers that you haven't seen for quite a long time.

So I'm actually very happy to be back here this year to take you through the performance, not only for this year but actually I think even more importantly, the excitement I have for the brand for the next few years.

So let's start with the performance. First of all, from a sales perspective, there's really 2 key points I'd like to make. The first is that we have outperformed the category in every quarter this year, including the fourth quarter. So that means we are growing share in every quarter and for the full year.

The second thing is that since the launch of the Doritos Locos Tacos in the middle of March, we have outperformed every competitor that we compete against, whether it be Mexican competitors, burger competitors or sandwich competitors, our performance has outpaced that of any of those brands.

The second key thing is that whether it's trust, quality or food safety, all of those scores, whether we make them internally or externally, have improved and are actually ahead of where we were in the fourth quarter of 2010.

And last, we are consistently ranked as one of the top brands now in terms of both our employee and our customer engagement through the use of the social media vehicles that we put in place.

So clearly, it has been a turnaround year. Now while we were doing that, we also created a cultural icon. And with only 3 weeks to go this year, it is pretty clear that we will sell 300 million Doritos Locos Tacos, one for every person in America. The really good thing is that there's 123 flavors of Doritos around the world, so I think the runway for DLT innovation is massive.

Now, when I spoke to you a year ago, I said we were being driven by 2 fundamental insights: the first was that our core customers wanted us to be a better Taco Bell; and our light, lapsed users wanted us to become a more relevant Taco Bell. The good news is that Doritos Locos Tacos has made us a better Taco Bell. It has driven frequency amongst our core male user group. Equally exciting, Cantina Bell has made us more relevant, particularly amongst women and light, lapsed users. So we've got frequency growth, we've got reach growth from women, and obviously we're getting both of those compounding to give us the sales growth that we are seeing this year.

So what do I see for the future for Taco Bell? Well, I see a very, very rosy future. We're going to focus on 4 things. First of all, we're going to win in all dayparts and I believe that through both organic growth and by winning in dayparts, we can actually drive our average unit volumes from about $1.3 million up to $1.8 million.

I believe that we can deliver value and trust in every transaction. As I'll show you later, I think our operating performance is second to none in the United States. I also believe we're very capable of building an incremental 2,000 new restaurants in the next 10 years, and I'm going to give you a compelling evidence so that you'll also leave a believer like me.

In the last years that we're going to sustain and having regained our industry-leading margins, we're going to sustain those margins and all of this will be underpinned by world-class operations. And if you do the math off of this page, we have 8,000 restaurants doing $1.8 million, then we will double the sales of Taco Bell in the next 10 years.

So I want to announce a breakthrough, and the breakthrough is that we have recently concluded negotiations with our franchisees. And we are now papering up a new franchise agreement. Now there are many factors and there's a lot of positives to this change, but the key is we are the only brand that will offer a 25-year term for a new restaurant, or straight or in offset. And in return, the franchisees have given us all of the marketing dollars. There will be no local marketing for Taco Bell going forward, it will be all national.

So what can we do with that money? Well, let me explain to you, we've already put in place the media plans for 2013. You will see from us, a 44% increase in the TRPs for general markets. You will see us running over 4,000 TRPs of national Hispanics, which we have never run before. In fact, our total TRP increase, including social, radio, Hispanic and general market, will increase by 64%. And we believe that is a massive increase that no one else in the marketplace will bring, and that combined with the breakthrough product innovation, we believe will not only drive same-store sales growth over a very successful 2012 but set us up for actually, a decade to come.

What I should say is that when we went through this franchise discussion, the great news is that we had a vote, and 99% of the franchisees voted, and 100% of them voted in support of both the new terms, as well as the move of the marketing funds.

So what's our strategy? Well, the strategy is all about execution. It's about focusing on one brand voice, two new dayparts and three platforms that we've clearly established. I think one of the biggest moves that we made in 2012 was we walked away from Think Outside the Bun , and we moved to Live Mas. Let me tell you, this was obviously inside driven. Food has moved from fuel to being an experience, that was the easy part. The hard part was convincing David to walk away from what he thought was the best tagline in fast food. However, having made that gigantic leap, I want to let you know that I think Live Mas is the cornerstone of probably the most important move we've made for the brand and the reason is very simple. Mas is more. Who does not want more flavor, who does not want more choice, more customization, more value or more heart from a brand? And so I believe that this move has been paramount to us, not just having a successful 2012 but really will enable us to have a successful decade ahead.

We've changed the way we go to market in 2012, probably more than in any other way we've changed going to market in the past. And here's the key insight and if you take nothing else away, I just want you to take this one point away. We are moving from getting people to buy Taco Bell, to getting people to buy into Taco Bell. And that is a big difference. People do not want to be to marketed at. People want us to be a part of their lives and they want to buy something bigger than just the food or the experience or their value. So you will see our marketing as you see on this stage, whether it's where we use the Doritos Locos Tacos, we took your tweets and your Facebook comments, we threw them back up onto mega- screens at both Times Square and Rodeo Drive. We then took photos of that, brought it back to you and what did you do with it? You re-tweeted it and re-Facebooked to all your friends.

It could be operational after where a hoax was played on Bethel, Alaska, a town 4 hours from Anchorage, 6,000 people, who thought they were going to get a new Taco Bell. Well, they didn't get a new Taco Bell, but we did helicopter in a taco truck and gave away 10,000 tacos. That generated over 80 million impressions amongst our social media space. And my favorite of all of them is actually the tweet-off that occurred between the Old Spice brand and Taco Bell, which you're probably saying what is that all about? So Old Spice tweeted us and said, why isn't that fire sauce in your fire real, is this false advertising? So we tweeted back and said, is your deodorant really made from old spices? Now, the really funny thing is this was retweeted 414,000 times. It was then picked up by the Huffington Post, and the headline was: Taco Bell smacks down Old Spice.

This is the way to not just get people to buy Taco Bell but to get people to buy into Taco Bell. And if you can take the fusion of this new emerging social media with the traditional media, you could develop powerful advertising. So what I'd like to show you now as an example of how we've taken user-generated content and turned it into a traditional 30-second commercial. Let's have a look.


Greg Creed

Not surprising they'd go at the Instagram spot. Now, I spoke to you earlier about both our internal and our external quality measures have shown dramatic improvement, and I think the UGOV brand index demonstrates that quite clearly.

There's an obvious point I want to make here, and then I think there's a not so obvious point that I'd like you to think about. The first is we've clearly improved our quality scores. So we've gone from pre-Cantina being a score 14, and Chipotle being at 32. So obviously, it went out 25 and Chipotle is at 28. The obvious takeaway is we've improved their quality perceptions. But I think the bigger question you need to ask is that pre-Cantina, Chipotle had a price premium that I think was probably justified by the difference of people's perceptions about the quality difference between Taco Bell and Chipotle. Huge quality difference, huge difference in what we expect to pay. I think the question the market is going to ask is with now, our quality perceptions being so close, is the price premium justifiable? I don't know what the answer is. I think we're going to let the market determine what the answer is on that key question.

Now we continue to drive dayparts as I said earlier. The good news is we are in 817 restaurants with First Meal. It is actually at breakeven right now, which we are very excited about. And mixing the daypart is now mixing between 5% to 6%. We've achieved none of this with what you would call our traditional media. This is really being driven by local marketing, by POP and by really, outstanding products. The good news is we've developed differentiated products like the A.M. Crunchwrap and we now know that this product is preferred to the Egg McMuffin amongst McDonald's breakfast customers.

We are also developing second differentiated product, but I don't want to tell you about it because I don't want my competitors to know about it. The second one is we're getting into the sweets and treats business. We've actually created a bit of a cultural icon, the Churro. Would you believe, of all the 10 million Facebook fans we have, it has become quite an icon, and it has now more likes as any product on the Taco Bell menu and the sales growth of churros is growing quite exponentially.

The last point is snacking. Obviously, our restaurants are open between 2 and 5. We have people in our restaurants, they're called employees, and what we would like to have is more customers in our restaurants between 2 and 5 as well. So we're going to get -- I think we all culturally know the happy hour, which many years ago, was $1 drinks and $1 food but if you live in New York City, it's probably $10 drink and $10 food. Well, we're going to take the happy and we're going to reframe that as the happy-er hour. And between 2 and 5, we're going to offer $1 drinks and $1 food. The good news is we've tested this is the delivered transaction growth in that daypart of high-single digits. We will be rolling this out in 2013.

So making really great progress on breakfast, the launch of sweets and treats and obviously, moving into happier hour.

Now as I said earlier, we've created 2 platforms. These are not products, these really are platforms. So obviously, as I've said earlier, we will sell approximately 300 million nacho cheese. We had, if you remember, planned to launch Cool Ranch in the fourth quarter this year. But due to capacity issues, we just were not able to do it. So we've actually had PepsiCo build 2 new lines, and we now have the capacity to continue obviously, nacho cheese and in the first half of next year, we will add Cool Ranch. And the other exciting piece of news is in the second half, we will launch our third Doritos Locos Tacos brand called Flamas. What's interesting is, in the test market, Flamas has the highest depths of repeat of any product we've ever launched at Taco Bell.

And insistently enough, Flamas is only sold in Doritos bags in Hispanic markets. We tested this in the Hispanic hotbed of Toledo and actually delivered really world-class results. What we'll also do is move into variety packs. The exciting thing about the variety packs right now is we sold 12 crunchy tacos for $10, we're going to be selling 12 in the variety pack but taking the price to $12.99, all of this is being tested.

The second one is obviously the Cantina Bell menu. So Cantina Bell has fundamentally changed people's perceptions of Taco Bell. I showed how it demonstrated and has changed our quality perceptions.

I have a franchisees say to me they are seeing people they have never seen come to Taco Bell. This brand has transformed us and as a result of that, it is one of the 2 key platforms we will execute going forward. The really exciting thing is we actually had planned even though we have had chicken and steak available in both bowls and Doritos. We've only actually, this year, promoted the bowl with chicken because again, we had some steak capacity issues given the performance the brand.

So in early 2013, we will introduce a new steak marinade, relaunch steak, put it in a burrito and then what we're also going to do in 2013 is expand beyond the bowl and the burrito into quesadillas, which as you know, are very popular at Taco Bell and then my personal favorite, will be launching a Fajita Cantina at the end of 2013.

So hopefully, what I'm demonstrating here is the runway of innovation around the these 2 platforms is essentially only limited by our imagination. Now we have thrown an enormous amount at our operators this year with the transaction growth and the sales growth and all the innovation.

What we also know when we talk about operations is that there are 2 key fundamental requirements to drive through, they are speed and accuracy. For a long period of time, we were very fast, but we weren't very accurate. In fact, no brand was in the top 5 at both speed and accuracy. Now we became obsessed around delivering a top 5 performance in both speed and accuracy.

And I could not be more proud of what the operators, both the team members and the restaurant managers have done, which is we are the only brand that is top 2 on the 2 things that matter most in the drive-through, both accuracy and speed. And while achieving that, we've also improved the cleanliness of the restaurants, where we are now ranked #1 and our hospitality is up 2 places from #5 to #3. When you consider the amount of innovation they'd had to deal with, this is a world-class performance and I believe sets us up for further growth going forward.

From an asset point of view, since 2008, we have upgraded essentially 3x the number of assets into the bowl system, which you can see in the photograph. I think that this number, which is 56% of math are completely done and obviously another 34% have parts of the bowl which puts us in an asset development program well ahead of our competitors McDonald's, Burger King, Wendy's. This asset upgrade system really does put us, I think, in a place where both the assets and the experience are aligned with both the food and the value.

Now I spoke earlier and I said that with this new franchise agreement, we've given the franchisees 5 years more term, 5 years more than any other competitive brand gives. But that was only 1/2 the story. And here, is the other part of the story that makes this even more compelling. We have worked with our franchise partners, and we have been able to pull $230,000 out of the cost of a new build. So what was once a $1,060,000 is now $830,000. So I want you to think about this, when we talk about development and building 2,000 new restaurants, it was a $1.060 million, and you got 20 years, it's going to be 25 years and it's going to cost you $830,000.

That's fundamentally altered the economic model for my franchisees. But wait, there's more. So this week, we had a big franchise meeting in California, and we announced to them because we believe having analyzed the 2,000 new restaurants, that over 1,000 of those restaurants will come from rural areas where McDonald's is really well-penetrated but we've not had the economic model to penetrate.

So we announced to the franchise leadership on Tuesday that in addition to the 5 years, the $230,000, we have a rural test incentive which is essentially another $150,000 they will save for every restaurant registered and opened before the end of 2014. That is not limited by any number of stores or any amount of money.

So I want you to think about that. $680,000 will get you a 25-year term in a rural area where just days ago, you would have expected to pay $1.030 million and get 20 years. As you can probably imagine the excitement around development and new unit development of Taco Bell has never been higher.

So as I said earlier, where hopefully, I've demonstrated with focus on winning in all dayparts and making huge progress in all these dayparts. I do believe that certainly within the U.S. context, we run world-class operations. Hopefully, with the announcements I've made today regarding the new franchise agreement, as well as the incentives, as well as the cost reductions, that you agree with me that we can build 2,000 net new restaurants in next 10 years. We can sustain back to the 18% margins that we have rebuilt. And as I said, if you do the math, it would double the sales of Taco Bell in the next 10 years.

So I think even though this is our 50th year, and it took us 50 years to get to $7 billion, we think that by the time we celebrate our 60th birthday, this can be a $14 billion plus brand. And the great news is the journey has just begun.

Thank you very much. So I think now you got -- no hand over -- a 5-minute break, 5-minute break.


Tim Jerzyk

If everybody can grab their seats and get back so we can get started again. The sooner we get started, the sooner you will have lunch.

I know you're excited, but there's more. I'm very happy and very pleased to be able to announce my old boss, Rick Carucci, President of the Yum! Brands, who will talk about how we think about building shareholder value. Rick?

Richard T. Carucci

Well, good afternoon, everybody. And as some of you have known us for a while -- before I get into the meat of the presentation, I would like to start with some lighthearted slides. And because I'm going to be brief today, typically, I usually poke fun at what's happening in the world and a little bit of David, Tim and I. But this is a time I had to pick 1 of us, and my instincts told me that I shouldn't push my luck with David this year. For some reason, I thought that would be career limiting, and it wasn't just because he used the words, "Rick, if you do that again, I'll fire you," because he actually says that every year. But if you work with somebody for a while, there's something about the tone of his scream and the grip on my throat that just made me think it probably wasn't a big idea. So I had to choose between me and Tim, and since this is Tim's last year, I decided to honor Tim. And so, we're going to have some fun today as to look at what's Tim doing after this, in particular, what's Tim going to do after he retires from Yum! Well, the first thing he's going to do is he's going to go to Disney World, as all great celebrities do. The next thing he's going to do, he's going to buy a house in Florida and start to take it easy. Now at -- wait a second, never mind that, he's already doing that. Now speaking of taking it easy, what else could Tim do to take it easy? And the people in this room could really appreciate it. He thought he could become a sell side analyst. Again, we have managed this years ago. And the Jerzyk report, as shown by his business model is going to cover 1 company but cover it very well, and by the way, I think his success rate may be better than some of the people in this room. But moving right along, so this is a very sweet spot. So the question is, what other endeavors could Tim undertake? And away from the analyst community, we are in New York and so New York definitely needs some help in a local area that we noticed. So he could become the Jets' quarterback or the coach. But my favorite, which really utilizes one of Tim's trademarks, is I think he would just be a great motivational speaker and coach. And for those of you who don't know Tim, when he doesn't like something you said or a certain question, he just writes back with a question mark. So he just leverages that great equity that he has in the brand. But what he's also going to do, and these people don't realize his talent, he's going to go completely to the other side and show he's going to write that book he always wanted to write, so 50 Shades of Green and again, apparently New York Times early edition is Green as senior than Grey. So how about one more hand for Tim Jerzyk?

So I have the privilege -- I actually do have a presentation here. I have the privilege of wrapping up for us today, and I -- it is actually fitting that I honored Tim because what we want to do is build shareholder value with intentionality, and Tim has always done a great job of making sure that we make decisions for the shareholders in the room, and I feel we've institutionalized that within our company. So you heard the people presenting today, they're talking not just about next year but what's going to happen 10 years from now. And while everybody wants to grow the company, we want to grow it in a way that works for our shareholders.

Now, David sort of summarized in his last chart of the day of how you build shareholder value in retail, and I think we're completely aligned on this. As you do it through new unit development, including same-store sales growth, and doing it in a way that gets you high returns on your invested capital. And what we want to do is we want to do that in the short-term but also do it in the long-term. So I'm not going to summarize all the great things you heard today about how we do those things. But I am going to sort of put it together and show you some of the principles and themes that we use as a company to do each of these 3 things.

First of all, in new unit development. Whenever you speak about new unit development, you have to start with a business model that works. And I know the first time when I visited an emerging market, a new country, the first 2 things that I look at is how well is the brand positioned and do you have solid unit economics? Do you see yourself in it building an economic model that can support the brand and then allow you to build a lot of units? And China, obviously, has done a great job of this over the years, and Sam Su and the leadership team has always been very thoughtful about the business model.

The reason I was very enthusiastic when I visited India a couple years ago is I really like the way our brand was positioned versus everybody else there. And I saw that we are very close to having a business with great unit economics. And Niren shared some of those with you today. We have very good unit economics, brand is well-positioned. When you have those things you could really build a lot of units over time.

So as you do those, 2 things: one, as we sort of said throughout the day and we've probably said for last several years, we're the leading developer in emerging markets. We'll continue to do that as long as we do have the business model that works. But the good news is, we think we've improved our economic model in the U.S., and so that's rekindled development in the U.S.. I'm going to talk a little bit about that in a second.

You've seen a lot of slides, so I'm not going to spend a lot of time on emerging market, new unit development, just one, and that is, in 2007, we were already the leader in emerging market development, with about -- a little over 1,000 new units per year. So we were larger than everybody else and we were building faster than everybody else.

Well, the good news from my standpoint, in the last 5 years, we've increased that number to over 1,500. So if you do the math of China, India and in the YRI piece, we'll be building over 1,500 new units this year in emerging markets.

So as I just said, I'm also excited about the U.S. And Greg just took you through that we improved sort of the cost of those units at Taco Bell. And so we -- in the smaller Taco Bells and especially in rural America, you could build units, as Greg said, for $830,000. Well, the good news is, we already did that work a while back on Pizza Hut Delcos in the U.S., so we could build units there for about $250,000.

So Greg outlined this that if you bring that cost down, you could still get the sales throughput. It really improves the payback and the return on investment for our franchisees and that will allow us to build units. But the business's model is obviously more than just the cost of the unit.

And one of the things that I'm really pleased at with our company, and this started with Pizza Hut in the U.S., is we got a bigger focus on getting supply chain savings. There was always something that we worked on, but we're really tore it apart. We looked at how we spec our products. We look at how we source our products, and that team led the way. And this year, they got about $100 million cumulative savings since they started that project a couple years ago.

Well, the other parts of our businesses that have taken up that project as well. The Taco Bell and KFC in the U.S. started towards about the end of last year, so they got some savings this year as they've flowed in some of the savings that were -- but we also think that the bigger impact would be in the 2013, when those markets we think will save about $50 million each on the supply chain. We're also looking at other opportunities around the world as we speak.

So as you get improvements on the unit cost and then you improve the unit economics, obviously, puts you in a better position to build units. And Pat talked a little bit about this, but let me amplify the point. If you go back a decade -- at the end of last year, 2011, if you back a decade, we actually had about 17,000 units. So in a decade, we went from 17,000 units 10 years ago to -- 16,500 in 2007 to about 16,000 units in the U.S. last year. If you look at that early growth rate, we're actually losing about 1% of units per year in the U.S. until this year, right? This year, we actually had a small increase in net units. But what I'm excited about is if you look at it by brand and look at next year, Pizza Hut will add at least 120 net units next year. That represents a 2% growth. Taco Bell, we have conservatively in there at 60. I believe in 2014, that number will also be at least 120 units. So you have our 2 biggest brands in the U.S. adding 2% unit growth. And when we talk about the confidence we have in the 5% growth model, if you go from minus 1% units to plus 2% units, it's a big difference.

Now KFC, as David talked about briefly, we're not yet there. We're still having negative net units at KFC, but we've done a lot this year to solidify our business model there.

So we had sales growth, some profitable sales growth. Our franchisees are making a lot more money. And we told you through our refranchising that we would make more money as well, and that's part of the reason why you see the strong U.S. profit growth this year.

So that's it on the new unit side. The next way we grow sales is through same-store sales growth. And a lot of this is stuff we do year in and year out, we know in our industry, we have to have value and innovation. We also know when we started 5 years ago, we really wanted to increase our commitment to sales layers and dayparts. Now we know, as Greg also mentioned that, that has to be enabled by world-class operations, and not just at Taco Bell, but throughout the world, we're really focusing in -- on improving our operations. We have places around the world where our operations is just outstanding, but we know, especially in the U.S. where we have too much inconsistency in our operations. And we've been starting doing a lot of things starting a couple years ago to improve that. And here's just some of the ideas that we have.

Some of it is ideas like -- David showed a picture on the left on throughput, and that's called our Fusion Line. That allows us to get more throughput in high volume outlets. We're looking at opportunities like that.

We're also looking at the real basic things like better speed through time at KFC in the U.S.. So we're always going to be looking at how we build our model. A lot of it is just basics and things of using technology better and to train better, right? So we have improved warming cabinets at KFC in the U.S., as an example. Also to use KFC as an example, if you go back about 4 years ago, we only had about 25% of our cost of our franchisees using the same system that we call the standard system for back of house. Today, that number is over 50%, the franchisees have committed that number will be 100% by the end of 2014.

As everybody is converting to the same back of house system, that's makes it much easier to train people with the use of electronic learning, so that people could train much easier and in a way that the young people identify better today, plus it allows us to control the quality of that training.

And while Taco Bell is out ahead of the rest in the U.S. and you're seeing the results as Greg said, we believe that the consumer will start feeling it in the rest of our brands in the next -- in the coming years. So we're very focused on this, and we know this is the foundation of the business.

We're also going to continue to push value. I gave some of these -- or some of the value things that we had in place in 2012. The lunch value menu at China to help weekday lunch was -- was very successful. Taco Bell's always had a live day 4 menu -- Why Pay More? menu. And then, Pizza Hut's -- part of the success in the initial video, you saw Scott Bergren say we had 3 good years of growth at Pizza Hut. A lot of this is because we fixed the core value. And $10 pizza is a big important part of our equation there. When I talked earlier about managing the supply chain, what that's also allowed us to do is to maintain that $10 price point while there was in inflation. And while cheese is expected to go up a lot in the U.S. next year, we're confident with the cost savings we've put in place that we're going to be able to maintain that price point throughout 2013.

Obviously, we love innovation. You've heard some of the great ideas in the markets around the world. We're going to keep that coming. This is one area we're not going to talk a lot about what we're going to do next year. You've heard about Doritos Locos Tacos and Bites. The Super Pan Pizza is an international Pizza Hut innovation, which took the Pan Pizza and combined it with the stuffed crust, so we stuffed crust the Pan Pizza. It's a slightly indulging product. It tastes fantastic. That product actually got the 28% of the mix in Malaysia, where they did it, and so we're going to take that idea to some other places around the world -- around the YRI world.

But the area that we really know we have to make progress on is sales layers and day-part expansion. We modeled ourselves after McDonald's globally and KFC in China. We've done a great job of this. And we're really working on different day-parts in different parts of our businesses around the world. Greg talked about breakfast already Taco Bell, where we opened up about 800 delivery units in 2011 and '12, but our goal in 2013 is to get more throughput through those units so that we are in a position to take it nationally in, hopefully, 2014.

We didn't talk a lot today about KFC breakfast and international, but one of the areas that we want to make progress in, in 2013, is our goal is to add over 800 points of distribution in breakfast at KFC. And Asia's probably going to be the leading market in which we do that, so we want to be able to fill that day-part for years to come.

Within the U.S., we sell wings in all of our Pizza Hut units right now, but the branded wing of Wing Street is only in a little more than 50% of our outlets today. We reached agreement with the franchisees that we're going to be able to take that number up to 75% by the end of 2013, which allows us national advertising with the goal to getting to 95% of the units by about mid-2015.

For KFC in the U.S., which we know this brand has a long way to go, we think the best sales layer for them is catering. And right now, really, the only QSR that does catering well is Chick-Fil-A. A lot of the fast casual people do it, but really nobody in QSR. And we believe we have the best food types in order to do catering. There's been a lot of work, and we started doing the packaging and the products right during this year, and we expect to take that to consumers in the second half of 2013.

So we're very excited about the progress we're making in sales layers. It's really not going to have a huge impact necessarily on our business during 2013, but the progress we make in 2013 will help us a lot going forward.

So as I go to the next reason why we wanted to have same-store sales, it was pretty obvious, right? We talked about McDonald's and China being our role models, but we know we'd continue to innovate, continue to provide value and more importantly, build these sales layers, we can have a lot bigger business. So as an example, China today averages 1.8 million in average unit volumes. If you take China out of the equation, the rest of Yum!, our average unit volumes are only 1.1 million. So basically we have a huge opportunity to grow that 1.1 million, basically if we do the things that I just talked about and that you heard from our presenters today.

So as I go towards the third way to build shareholder value, is high returns. And this is an area where, Pat mentioned as well, we're going to be very disciplined in this area. And one thing in this business I realized a while back is if you want to get a high return business, there's 2 areas you have to manage extremely well: one is capital and the other is ownership. A couple of comments on capital, and then I'll take you through the ownership piece.

On the capital side of it, you just have to make sure you're seeing reality and being focused on what your results are. I think the people who have made mistakes in this business have done 1 of 2 things. They either built restaurants ahead of their operating capability or they weren't nearly reading their results of new units well. And sometimes I have been guilty of that. A while back in Puerto Rico, we probably built a little too fast and so, hey, that first year we built that, we were explaining a lot of the results, all right. And then what ends up happening is you have a problem down the road if you have too many units.

So one of the things we're maniacal about is looking in new unit returns. If you were to talk to any of our general managers around the world, they would be able to tell you in detail how they're doing on their new unit performance. It's something that we track extremely closely.

Now the other thing that you have to do is manage your ownership. And at Yum!, we've made a decision we're going to have several business models. We mentioned we're in the business rental model in France, the primary reason in equity business model of franchise, and we think that in a global business, you want to have variety of business models. But then you have to make the right decision as what's going to be franchised, what's going to be company-owned. And the way we look at this, we look at this a lot from the shareholder perspective because we're going to be in the business one way or the other, right? Either getting, collecting franchise fees or getting company ownership. When we want company ownership is when we meet that criteria. We want to make sure it's a place we could have significant scale, where we could have high-growth, strong unit economics, where we lead our franchise community and obviously, we look at the -- can we operate in that country from a list perspective.

Now what's interesting when we apply that philosophy, we've never targeted ownership percentages of company-owned and franchise, and I've always been stumped when people have asked me the question, and so we'd go to look up. And this is how it works. If you look at over the last 10 years, even though we've built a lot of company units in China, our actual mix of company restaurants is actually slightly going down. So we've grown across the franchise system, as well as the company system. However, the mix within that company has changed a lot, right? So -- and Pat showed that in broad terms where today, we have 68% of our ownership is in emerging markets, so it was quite different than that in 2002. And so, you -- when you see a few things, you could see how big that China number has gone up. In the U.S., with the franchising program, we refranchised about 2,600 restaurants, so that's the reason why our company ownership bar is so much smaller.

As we go forward, what I'd expect is, I'd expect that China, YRI and India bars to continue to grow. Hopefully, we'll get growth in the U.S. as well, but we're also refranchising 200 units next year. So my guess is by the end of 2013, our U.S. mix of company restaurants, which was 65% in 2007, will be about 20% by the end of 2013.

So obviously, if you make those decisions right, if you make the right decisions on capital, right decisions on ownership, it improves your ROIC. We've able to increase our ROIC by 3 points. We're over 20%. We're proud of that. But what a lot of people don't know is we've got strong returns across the system.

Well, China, obviously, not everybody has the margins and returns that you hear about in the China business. Our YRI and the U.S. have had great returns because they have highly profitable and very high return franchise businesses. So now we're at over 20% of the refranchising at the UK business. We're over 20% return on invested capital in all 3 of our major business. India is right behind. They're going to be there in the next decade. We're not even worried about what India's returns are right now. What we care about, as what I said before, we're building the brand positioning, right? We're building unit economics that work. We'll invest whatever G&A we need to do to grow the business into the future.

So if we do these things well, new unit development, same-store sales growth and high returns, we know we'll increase shareholder value.

Now one of the questions that I get, especially as I moved into my new position, they say, "Rick, what are the things you're most proud about your time at Yum!?" And I'd say that there's 2 things. The first is our quality of the people. I'm proud of the people in the finance function, which I led. You saw Pat Grismer, you're going to see in David Gibbs and others when you go through the modeling session. We have a very strong finance function. But I'm really proud of the quality of our teams around the world. Some of them presented today, but if you looked at our leadership team, not just the general managers, but looked at all their direct reports around the world, I'm very confident you'd be impressed with the quality of the people we have. We have people joining our company today, with lateral moves from some of the most prestigious companies around the world really because of the success we've had as a company and the culture that we have in the company, and people believe that we're going to continue to grow our business.

The second thing that I'm proud about is we've been able to get this balance right. This balance that's short-term and long-term. And I certainly believe that you need to be able to produce strong business results year in and year out, but you also need to build a foundation for the future. So when I look at 2013, I believe that we're going to have new unit growth, same-store sales growth and high returns and add shareholder value in 2013.

What we've also seen is that we're building the foundation to grow down the road. So the chart that Pat showed about growth in 2020 becomes a reality. So I listed the populations that begin with the B, India and Africa's places and we're going to get that growth, little sheep in [indiscernible] in China, never mind what's closer in. Pizza Hut Home Delivery is going to give us opportunities there. Taco Bell International, we have a lot of work to do, but I believe that has a potential to be a big growth driver for us.

So the thing on that side of the page are really not going to drive our performance much in the next 3 years. Those are the things that are going to drive our performance in 2020 and beyond, but we're investing the time today.

So I'm proud that we've added shareholder value for the last decade. I'm confident we're going to add shareholder value in 2013. And I believe strongly that we're going to be adding shareholder value well into the future. Thank you.

David C. Novak

So what we're going to do now is have a question-and-answer period, and we're going to do this a little differently. We always have a lot of questions about China, so we're going to take all the China questions upfront first. So I'm going to ask Pat and David and the China team to come up and address the China questions that the group has.

Question-and-Answer Session

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jeff Bernstein from Barclays. We're narrowing it down to China, just a 2-part questions. First, I'm wondering, what would it take -- I know you said kind of first half, second half story for next year. I'm just wondering how you think about China next year and beyond. What would it take at some point to say maybe we have to do something different, not necessarily that's the case in '13, but at what point do you say maybe -- when does the mentality change to maybe slow the unit growth or perhaps franchise a little bit more, which I know we've talked about that might have to uptick a little bit over time, but just wondering, what would it take to see you do that? And then secondly, with the slowdown, I know you talked about being married to -- or preferring to see the restaurant margins start with a 2 essentially. I'm just wondering if the comps were challenged in the near term, is that a necessity to see the 2 and therefore you'd raise pricing or perhaps would you be willing to let it go below that 20% in the short term if the pressures prevail.

Patrick Grismer

All right. First, on the question on unit development. It's unimaginable to me that we would be taking down the pace of development given what continues to be an extraordinary growth opportunity given how under-penetrated we are today in the market and the dramatic growth in the consuming class and the introduction of new trade areas. So the development opportunity is there. Additionally, even over the last year, as we've seen some softening in our returns in the tier 1 cities, as I mentioned before, those returns can really be extremely compelling, well beyond our cost of capital. So we are adding or we're creating shareholder value with each one of those new store openings. In addition with that, we continue to see those 2 to 3 year paybacks in the lower tier cities. So as long as we have those compelling investment opportunities and as long as we're not developing ahead of our capability, there will be no reason for us to take down the pace of development.

Lily Hsieh

And I think in the past many years, we've seen some up and down in economy, but we always build the brand for the future. If you followed what I presented today, I think the brand equity are very strong. There's no reason that I think we should slow down of course, we will always adjust our calendars, our pipelines according to the needs of the consumer trend and I think we are very confident that we can continue building the sales and volume with our new sales layers and day-parts efforts.

Patrick Grismer

And then the second part of the question on the margin. So as you know, we've been in the range of 19% this year. Our long-term target continues to be 20%, and in fact, our core units are delivering north of 20%. And you have to bear in mind what we have here is a portfolio of units including some of our more emerging concepts, which create a bit of a drag on our overall reported margin. But as those emerging concepts develop further and as we move into an environment where the economy is a bit stronger and we see the level of transaction growth that we've seen in the past years, we're confident that we can achieve that 20%. That continues to be our goal, and as I said our core unit continues to deliver north of 20%. Yes, there is variability across the tiers as you would expect because they are different cost structures, but our portfolio, we're all to get that 20%.

John S. Glass - Morgan Stanley, Research Division

It's John Glass from Morgan Stanley. I wanted to get back at the slowdown you have seen in China because it's important. Well, tough laps or probably part of the explanation, you've had tough laps all year. In fact, the third quarter, I think your trough laps was more difficult, your comps are stronger. McDonald's extra trade, you actually saw okay results in October, positive, let's say. We'll find out November, Monday. Starbucks has said their business has actually remained relatively robust, earlier stages, different business. What are the plausible explanations are? They particularly took some pricing in the third quarter, how do you know that didn't -- what evidence do you have that did not tip the customer over in China and there's some pricing resistance? Can you talk about the rate of cannibalization if you measure that closely? Has that on the margin changed as well? What other explanations are there besides tough laps?

David C. Novak

First, on the issue of whether or not pricing had some impact on our traffic growth, we don't believe so. You may recall we talked about on our, of course our Q3 earnings call that we measured very carefully the impact of pricing as we rolled out a new pricing system, increasing the number of tiers to 12 and rolling through price increases in a very targeted fashion and somewhat slowly, and that was spent deliberately in order to assess the impacts to transactions. And over that period of time, we did not see a slowdown in transactions. At the same time, as Angela mentioned in her presentation, we look at our consumer metrics every single month, and our consumer metrics on value has not changed. So we've maintained a strong value proposition so we don't believe that is in play in what we saw in our transaction volume. As part of our presentations earlier, when we talked about what happened or what has happened in the fourth quarter, we talked about the fact that we had overestimated our ability to lap last year's extraordinary performance in a softening retail environment. So it was a function of lap and the fact that the environment is slowing down. So we would attribute a portion of it to macro. It's not that, as Dave said, we ever use that as an excuse, but it's hard to ignore the fact that there has been some impact there.

Unknown Executive

Yes, David Palmer.

David Palmer - UBS Investment Bank, Research Division

I'm fishing a little bit with this question because I'm just operating from memory, but this doesn't -- if the average unit volumes that we have today in China, are they -- is the gap between in the average of all units and if that gap widens versus new units substantially over last few years and -- I mean, why is that happening if it is -- I mean, remember you used to be somewhat 1.1 would be a new unit and 1.3 or 1.4 was your run rate. Are you continuing to see that ramp, I mean, like the following 3 years? I mean, in other words, these ones are opening at 1.3 in the Tier 1, will that ramp up to 1.8? Or are you perhaps looking at more closely and maybe with a worried look thinking, "Gosh, what if these things don't ramp to that level?" This is truly -- I'm having a bad class here.

David C. Novak

That gap has widened over the last couple of years, and there are really 2 things driving that. The first is that our new unit AUVs from year-to-year so if you look at the class of 2010 versus the class of 2012, for example, those AUVs have increased. What has happened is that our base business has expanded and in terms of same-store sales at a much faster rate. And so when you do the math, that explains a big chunk of that gap. The other thing is that as you look at the composition of our new unit portfolio, a much larger percentage of it is in what we would characterize as transportation hubs or emerging trade areas, which take a bit longer to develop, particularly again in an environment where there's been a slight slowdown in the economy. It takes longer to develop these trade areas from a broader retail perspective. And so, you see approximately longer maturity curves for that class of assets, which, as I mentioned, are accounting for a larger percentage of our total development program. That is -- we know that those units are going to deliver the returns that we expect. It's just taking a bit longer for the better retail area to develop.

Unknown Executive


John W. Ivankoe - JP Morgan Chase & Co, Research Division

John Ivankoe with JPMorgan. Using your data on KFC China, I mean, we've talked about value for money scores at 41 at the top 2 box scores, and in my experience, a score of 41 for top 2 box isn't high, so the majority of people don't -- I mean, I don't know specifically the question that you asked and how you asked it, but you don't consider the value to be above average or excellent. So the question is that the brand continues to get more penetrated and you want customer frequency to be a part of the overall plan, a, how important is it to move those value for the money scores up? And b, how can you achieve that without constraining your price increases or arguably even lowering your prices to increase value for money scores?

Lily Hsieh

Okay. When you look at the results because we conducted surveys in more than 45 cities in China every month and with 1,500 Chinese consumers on a constant basis. And it's -- to score 40, 45, still you compare with a wide range of competitions, including from the local Chinese brands. So I would say this, in the past 2 years, if you look at -- of course, I only show you the score we had last year. If you see the score for the last year, I think we still maintain a pretty good gap with our competition. And especially I think in the last year, we are able to catch up with our #1 competition in the market.

David C. Novak

And one thing I would add is, we -- our strategy everywhere is to bring with our quality, our variety, the brand relevance that we have and be competitive on the value side of the equation. A couple of years ago on KFC, we were actually behind McDonald's and now we're on parity with them, so we've improved the value proposition there, which has yielded the kind of business model that you've seen. The other thing is that Pizza Hut, I think what we've done with Pizza Hut has been quite remarkable. We actually have higher value scores than any QSR, and so that's been a big part of the big, I would say, revolution that's going on with Pizza Hut Casual Dining. So that's -- for us, we know that we got to be value competitive to win in any market. We're quite comfortable with the approach that we take. And we'll continue to make sure that we're relevant on that basis. But it's a balancing act.

Unknown Analyst

I mean, the consumer [indiscernible] you and McDonald's [indiscernible] price relative to comps. In other words, you're the ones [indiscernible].

Patrick Grismer

I think we're very comfortable with our business model, the sales, the traffic that we're generating, the margins. There's always a balance that -- we're frankly, we're not fixated on competition. I think -- I was talking to someone a little bit earlier, this is not a market share kind of category in my opinion. In packaged goods, you got people knocking, fighting it out for -- you lose a point in market share. We don't even measure market share. And we understand obviously what's going on in the category. What we want to do is maximize the revenue out-of-the-box by the listening to the voice of our customers and get the sales leverage that's required to keep your business very vital. And we really think we have tremendous upside at KFC with the 1.8 average unit volumes because we won the ground floor in Breakfast, home deliveries being developed, 24-hour services being delivered. But that's all geared towards getting asset leverage because we want that unit being cranking out sales all throughout today, because with the flow through on that incremental sales dollar, that's what will ultimately help us keep our margins above 20%. So I think that's a big part of the gain. But we're comfortable with where our value is, and we keep -- value for the money, that score itself comes from 2 things. It comes from what you get and what you pay. There's product value and then there's overall value that you drive just through the experience and your concept. And we stuck out very well comparatively. So it's not an issue, but it's always an opportunity and something that we will always go after. And we want to be watching it, be mindful of it. But we're not going to chase it.

Unknown Analyst

All the metrics you mentioned on Pizza Hut Dine-In sound terrific. So I understand the greater push for expansion there. Maybe talk about the average check and talk about the customer base for Pizza Hut Dine-In versus Pizza Hut and KFC. Are you dealing with a narrower slice of that consumer class? And as the consumer class doubles, does that narrower slice double as well?

Lily Hsieh

Okay. I think currently, the great thing about the Pizza Hut brand is that actually, we have a good price range for every single category we have, we serve in the restaurant. Take a salad as an example. You can get a RMB 15 salad and you -- a big salad or you can get a RMB 28 of salmon salad. And it applies to all our categories. You can get a RMB 39 pizza, you can also get a premium RMB 59, RMB 60 pizza. So I think we provide a wide range of price points in each category. So we are able to capture people with different spending powers. They can come in to get a very reasonable price point meal. But if they feel like they have something nice premium, they could also offer great quality premium products that they can do. So I think we are -- I would think we are on the sweet spot of the price point that we're offering to the broad base of consumers.

Unknown Executive

And Joe, we can't prove this, but my guess would be that the people who could afford Pizza Hut are growing faster than the middle class in general. The reason for the, first of all, we love the fact that the middle class is growing. But I remember -- if I go back in time, I remember the first time was about a decade ago when KFC was nervous about going to its first Tier 4 city. Can they push it, right? And now you have Pizza Hut, as little as 3 years ago, we were having problems with the second Pizza Hut in a Tier 3 city. All right. So the first Pizza Hut in the Tier 3 city that the city could absorb, boy, we're having trouble with that second one. But as we've got and won the value better on Pizza Hut, the relevance is better with the variety. We've now, as you saw today, adding Pizza Hut in Tier 4 cities, that opens up a lot of people. So people in Tier 4 cities can afford Pizza Hut. That's really good for us. And I think that's why we're sort of bullish about our ability to grow that brand. I think what we've gone for, Joe, too, just to build on and summarize is total ubiquity in terms of the relevance of this growing consumer class. The overall strategy has been -- and we've even had it in some of our advertising. You eat like a rich man, eat like a poor man. So if you don't have any money, you can come in Pizza Hut and enjoy the experience. If you have lots of money, you can have a steak dinner now. So it's -- that's been the overall strategy, and I think that total ubiquity that we've been going after has broaden the appeal of the brand. We've got the traffic levels up, and we're getting the unit economics that you saw.

Unknown Analyst

David Books, Lowry Family Group. My question is about long-term thinking around real estate in China. You drew the analogy between McDonald's A locations first mover position in the U.S.. My understanding is they own most of that real estate. How are you thinking about securing your long-term real estate locations in China?

David C. Novak

Well, the reality in China, it's very rare to be able to buy real estate. So pretty much everything is we did the handful of properties that are available to buy. If we have an opportunity to buy one of those in a best location in Tier 2 cities, we'll do it. So we've got overall very strong lease terms in China. We're getting more and more term on our lease. We're continuing to be able to have an exit of 6 months if we still desire. So we really like sort of the ability of that real estate. But to David's point, and your point, we always go for the best site. One of the things that I feel good about on a competitive piece and talk about Tier 3 and below cities is that we first found the best place in the city, now we've got the second best place in the city, then we got the third best place in the city and no one -- no one else is really there. And the example of the -- it may take a while for some of those best locations to materialize. So Pat has mentioned, some of the places we're going, the area hasn't yet grown. So I'll give you an infrastructure example that I remember about 3 years ago, I went to China and they had gotten the location, the basement of the Shanghai airport. This wasn't the international airport. It was a domestic airport. You have to walk a kilometer to the site, and there's nobody around. What were they doing, right? And so we get to this place. And at that point, I think it was doing about $600,000, $700,000, $800,000, it had just opened. While this year, we went back to that same location and David recognized the restaurant general manager. That unit is now doing $3 million, right? So we know if you go in to the first best place, that that's how we're planning it. So far, we could secure that real estate everywhere. The only places that we're struggling to be able to do that, we mentioned the Tier 1 cities where some of those that we've got in 10 years ago, when they're coming up for renewal, we're getting kicked out the coach, right?

Unknown Analyst


David C. Novak

Well, first of all, I think it's only a potential issue in my judgment in the Tier 1 cities. It's sort of like New York and Albany, they're not kicking us out for coach, right? So a lot of cities that I'm never going to have that problem. Tier 1 cities is tricky, right, because we have a lot of luxury people coming in there. Everybody wants to build in Tier 1 cities. So as we've mentioned -- as Lily mentioned in her presentation, we're being selective but we're going to stay the market leader. So sometimes that involves a relocation, et cetera. So for example, one of the things that they're doing is, is they're moving some of the people from CityCenter. So it's just in Tier 1 cities out to the outskirts of the city, right? And it's taking a little longer than maybe they first thought to build out the residential area. But we're it's going to be at that residential area, right? And so we're determined. Those usually do pretty well once the people move there. So it seems very thoughtful about it. When they took us through the review, they've gotten asked exactly where these locations are with the real estate things developed, where the train lines are coming in et cetera. And we naturally have a lot of people working on this. We have very good information not just with Tier 1 but throughout the country on that. So I think we're going to do it. I don't want to sound conceited, but I think we'll do it better than anyone else.

Richard T. Carucci

And I think one other thing on that. It was an interesting thing for me to see there's -- during one of my visits to China before we even bought -- actually acquired Little Sheep, the China team was talking about a development team, how interested they were and they couldn't wait on Little Sheep, because for them to be able to go to a developer and have a portfolio of brands, it's very powerful. Not only fast food, but casual dining. And we're taking advantage of that today, but it's going to get even stronger as we develop Little Sheep down the road. Over here. Go ahead, yes.

Unknown Analyst

I just wanted to ask -- to go back to the 2020 growth algorithm that Pat laid out, which implied a pretty sharp slowdown, I would say, in the China contribution just because China will be a much bigger piece of the business by then and yet, you're looking perhaps for less contribution from growth. So I just wanted to make sure I understood. I mean, I assume that's sort of a unit growth issue, but I wanted to understand the underpinnings of that. So first of all, can you kind of remind us, is there a number of units that you think is your maximum that you can add every year? Is it an implication about same-store sales, maybe longer term, or margins? Because historically, you've beaten that 15% EBIT growth rate pretty handily, so 5 years from now, to get a 6-point contribution from a business that's going to be more than probably half your profit pool is -- has some implications there?

Patrick Grismer

Well, there are a couple of things going on. Bear in mind that our current earnings growth model calls for 7 points of EPS growth coming from China. And what we've signaled is that in 2020, we believe that, that number will be 5% to 6%. And that is a function of several things. First, as we mentioned, the fact that the base is going to grow. So it's just quite naturally becomes tougher to deliver the same rate of growth on such a large base. The comparable growth number that is comparable to the 15% growth in operating profit that is implicit in the contribution of 7 points of EPS growth is on the order of 12%. So there will be a shift in the rate of growth. Now as you think about what will the size of this will be and what is required in order to deliver that amount of growth. And as we've indicated, we expect to sustain the pace of development of our existing brands. We will have the new brands come online, Pizza Hut Home Service, East Dawning, Little Sheep. So as we look ahead to 2020, we will see those brands come into more of the mainstream and build the contributing more significantly to our overall development program. So we'll have a broader portfolio to develop, which will sustain our ability to develop high numbers, the high numbers of units necessary in order to achieve that roughly 12% growth in operating profit looking that far out on a bigger base. Sara, I answered your question. Thank you.

David C. Novak

Yes, Michael.

Michael Kelter - Goldman Sachs Group Inc., Research Division

So I had 2 questions. The first one, the brand scores that you guys showed in China. I took a look back as you provided those in the past, and the numbers were almost universally below what they were in '08, in '10 and '11 when you guys last presented them, maybe at times with the Chinese investor day that you've held. And I wanted to understand if there was a change in methodology or if the brand scores are just legitimately lower than what they were. And then the second question has to do with the cadence you laid out for China's same-store sales where you said mid-singles but it will be more back-half weighted, but yet, you're going to have a lot less pricing presumably growing from the back half. So you have to get to call it 5%, 10% same-store sales without the same pricing that you have rolling through today. So is that a top-down macro comment that what you guys believe? Or is there a bottoms-up build and it's based on specific product launches and things that maybe are going to get you there?

David C. Novak

Why don't you go at the first one?

Lily Hsieh

Yes, on the methodology, we do then the methodology every 4 years to make sure the question of relevance and also the city we choose where we want to dilute the brand to understand where the brand stand for. And also, I have to say compared to a couple years ago, we do have a lot more competition. In the past in the markets, probably on 2 or 3 players. We do think more to be a competition. But compared to all the competition, I think we are still very comfortable with the trend that we're in the lead.

David C. Novak

In terms of how the sales will shake out based on historical perspective, I really don't know, Michael. I mean, I can't tell you how it's going to play out. I have no clue, okay? I do know that the business and the way I would view the business and the strength of the brands and the plans that we have and the teams that we have and all of the things I talked about, we're very, very confident that we're going to have another solid year in China. So we'll just have to see how it plays out, but I've never been able to figure it out. I mean, when we have 7% same-store sales growth 2 years ago, I was going to the team, boy, it's -- we're doing a very good year. That's going to be a challenging to get there. And the next thing you know, we're plus 20% or 19%, 20% traffic. That shocked the heck of them, okay? I'm being honest, totally honest. I don't have any clue. But I do know you got a growing consuming class, you got a growing disposable income, we've got power brands that are well positioned and the overall ratings basis what I've seen around the world are very strong, very high, those scores. And so basically what I know, I'm very confident. Because you guys -- I also know I've worked with you guys long enough, the proof is in the pudding, okay? We're going to have to deliver. And that's why I love these meetings. Everybody gets to stand up here and tell everybody how great we are, then we got to back to work and make it happen.

Unknown Analyst

I have a follow-up question on the profit outlook for China for 2013. As you think about sort of that mid-teens profit growth, how confident are you that you can deliver a number like that next year? And then maybe in a related question, how reliant are you on comps to get to that number? In other words, are there certain levers in the model that can be pulled if the comps don't materialize?

Patrick Grismer

We are confident that we will deliver the 15% that we're targeting next year. Of course, the biggest tailwind that we have is the development, the 800-plus units we're opening this year in the ground and will be contributing significantly to our profit growth next year. With respect to the same-store sales piece of it, you saw the plan that Angela shared and we are quite excited about what's in store for both KFC and for Pizza Hut by way of new product innovation and How We promotions, and we're confident that, that will deliver same-store sales growth next year. We're targeting mid-single digits depending on what we get out of same-store sales growth. There are also potentially opportunities around margin improvement with respect to continuation of productivity initiatives. So we believe that we can get to that 15% next year. But to David's point, it's nearly impossible to predict exactly what's going to happen with same-store sales growth. But we are very confident in the strength of our programs and where we're positioned with our brands. And we're targeting mid-single digits and that will get us the 15%.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Mitch Speiser, The Buckingham Research. Just following up on the cannibalization question earlier. And as you mentioned that you are shifting unit growth from a Tier 1 to lower tier cities, one reason is due to -- or a couple of reasons due to real estate and labor. Is there an incremental cannibalization issue that you're seeing? I'm sure you're probably more penetrated in the Tier 1, Tier 2 cities. Have you seen any incremental cannibalization? And maybe just on a separate note. In terms of 2013 unit growth, I was under the impression you are slowing it a bit, it's 800 this year. I thought it was 700 next year. So is it -- I mean, are those the right numbers? And is it because of slower growth in the Tier 1, Tier 2 cities?

David C. Novak

Pat, you want to do the cannibalization first?

Patrick Grismer

Sure. On the cannibalization. As Rick mentioned, our high development team has extraordinarily capability to read the results of our new units, and they spent an enormous amount of time tracking that. And as they've looked at the impact of new unit development on existing units, they've not seen a material shift in that cannibalization number. So we're not seeing that impact.

David C. Novak

Yes, and the other thing I think was in Weiwei presentation was the number of new cities, so that actually -- that pace of going into new cities has picked up. So despite the fact that you've had an increase in new units, a fair portion of that, some good portion of that is new cities, where you're not going to get any cannibalization. So I it's been -- I think, when we look at it, it's been roughly pretty steady over the years.

Patrick Grismer

Yes. On the 700, bear in mind that for 2012, we guided that at least 600. We had opened in 2011 north of 650. So the guidance of at least 700 is the highest guidance we've ever given. I wouldn't necessarily say that we're conservative in establishing those figures. But we talked about a number that we know we're going to deliver because as David and Rick mentioned, we don't chase numbers. We're all about building quality units. We want to make sure that the team is focused on securing the best sites and building the highest quality units possible. Do we have the capability to build more? Absolutely, we do. And if the opportunities are there and we're confident that they're going to meet our standards, we will build them because they are high-return units. But that's the way we establish our guidance for many years is to communicate a number that we know we're going to achieve. And past this prologue, we're going to exceed it. But our guidance is at least 700. It doesn't necessarily mean that we're taking down the pace of development.

David C. Novak

I've said this before, Mitch, the way how look, as we got these 2 great brands, they're diamonds. We want to keep polishing the diamonds and grow only as fast. We have the people, capability and the right size. And so one of the things we learned, we learned a lot of good things from PepsiCo when we were there, and we certainly enjoyed having the great people at PepsiCo in our company, but when PepsiCo ran the restaurants, they have these incredible targets all the time. And people are chasing these numbers. And what I like is the 700 number, you signed up for that 700 number. We didn't tell them what the number was. If they came back and told us it was 500, I'd come to you and say, "We've got a problem." And then we'll deal with it. I mean, that's -- and I tell them the same thing. We're not going to be chasing any number. If we got an issue with our brands or our customers or whatever, we're going to have a problem, we'll deal with the problem, then we'll figure out how to move forward. But as long as we're building the brands the right way, let's go. We feel very good about the 700. We've beaten the targets we've had in the past. But I'm not going to be beating them up to beat that target. I want them to beat the target if they find the size, okay? That's the way how we run the business and that's why every time I go to China -- I can't tell you how I emphasize that point. And I make the same point in India, okay? We're not chasing profits in India right now. What we're chasing is the business model and the capability. And I think that formula will serve us well as we continue to grow in China. But we want to build Little Sheep capability. We want to build East Dawning capability. We want to build Pizza Hut Home Service capability. I mean, we want the leading brands in every significant category. I don't know what's going to unshape in the next 10 years, but I think it's going to be pretty exciting. I think we'll probably wake up and be able to make a -- what did I say, I showed you what happened since 2009 when everybody thought the world is falling, takes 1 month. And the people all of a sudden think, "Oh, my gosh, what's happened to this business in 1 month, 1 quarter, all of a sudden? Isn't a great business? And we got 3-year cash on cash returns, we got everything you've seen here. "Oh, my God, the sky is falling." If the sky's falling, I'm going to know it well before you, okay? And I promise you, we'll let you know, okay? And I -- that stuff happens. If you look at our history, stuff has happened throughout our entire 15 years. We've had distributors almost go bankrupt. We've had to deal with avian flu. We've had to deal with SARS. We've had to with -- we've had stuff happened. And every time, we deal with it, okay? And I promise you, if our unit economics starts going down to a point where we don't believe we've got the kind of returns that we're talking about here, we will come forward and we will fess up and we'll figure out how to slow it down and get it back to where it needed to be and go forward. But we're going to wake up 50 years from now and, I mean, this business in China is going to look a whole lot bigger than anything that was ever created by anybody in the United States. That's one thing I'll bet. I just wish I could be around to see it.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Brian Bittner with Oppenheimer. Would you be willing to comment -- the weakening trends that you disclosed last week, would you be willing to comment if they've stabilized yet or if they do continue to weaken? And then secondly on the restaurant margins for next year for China, can you just maybe update us and quantify cost inflation, labor cost inflation and the potential effect of pricing?

Patrick Grismer

Okay. I will take that. The second half financial modeling session, we will take care of all those details. First question, as far as trends and all that, we took everything into account with every release. There is a lot of effort in to that to understand exactly we want to put forward. As David says, we want to put forward our best information. So that negative 4, the pluses in YRI and the pluses in the U.S., where all the best information we have with as of that hour almost. So we gave you everything that we're going to give you in terms of that, down 4 for China for the fourth quarter and consensus beating number for the U.S. and the consensus beating number for YRI, which nobody's asked about yet. But I know in the next session, you're going to ask about that. Okay. Thank you, guys. If we...

David C. Novak

One thing on this, just remember this. On China, we got a lot more confidence. Yes. Of course, the whole category is growing. I mean, we're going to -- the world -- China is not going to wait around, sit there and wait for KFC and just give us the whole business all by herself. I mean, there's still -- there's 2 major competitors over there in our space. It's us and McDonald's. I mean that's pretty good. That's a lot better than it is here, okay? But all these things that you talked about in terms of the competition, you pick up an article, you read about, "Somebody went in, they used to get their dessert at KFC and now they got it in some other place. My God, the world's falling apart, okay?" That's not the way how we look at it, okay? We got a great businesses, great brands and yes, it's going to get more competitive. Everybody wants to come in to China. But I think having 300 million people going to 600 million people, that's a pretty good thing to be a part of. That's kind of how we look at it long term, and we're going to, as Rick said, we're going to focus on short term and long term. We know we have 0 credit ability on the long term if we don't deliver the short term. Nobody understands that more than this group, I promise you, okay? But we try to do both. And that's what we're gearing to do. We're going to build some great brands, even better brands in China. That's our goal long term, all right?

Tim Jerzyk

Okay. Weiwei and Angela, thank you very much. And we'll do a little exchange and bring Greg Creed, Niren and Micky Pant pick up. We'll do questions for YRI, India and Taco Bell.

Gregory R. Badishkanian - Citigroup Inc, Research Division

Greg Badishkanian, Citigroup. My question is for David. At the last Investor Day, I asked you, what has the biggest potential for upside or improvement in trend? You mentioned Taco Bell, you were right. 2013, what do you think has the biggest opportunity?

David C. Novak

I think YRI is going to have a great year. I think YRI is -- these things, you kind of work on things and they start to build and all of a sudden, you get to some tipping points. And we got a lot of things that are starting to happen in YRI. And I think YRI is going to become our surprise division. It's kind of operated under the radar with all the China story and China going to make $1 billion in profit. But we've got a hell of a good story in YRI and the team is really making a lot of progress. And I think Micky and our group of GM's are really well poised to have a very good year.

Gregory R. Badishkanian - Citigroup Inc, Research Division

And question for Greg on Taco Bell stuff. Pipeline looks great. Just a couple of questions and a few of the points you're looking at in terms of Hispanic focus and media. What percentage, if you would, of consumers today are Hispanic? I wouldn't think the brand skews very high even though you're obviously serving Mexican food. And then secondly, I've heard from some operators out there some value tests that are going on. You didn't mention it really today. Can you talk about a little bit given McDonald's obviously focused a lot more on value, how you would potentially respond?

Greg Creed

Our share amongst Hispanic is as good as our share amongst the general population, which is to some people, surprising. And the media increase next year will be quite substantial. We've never run national Hispanic media. We would essentially run in the local big Hispanic market, Los Angeles, you could name them. So for us to have 4,000 TRPs national is a big deal. And we'll actually, I think, what will start to do is reach Hispanics living in all 50 states, that we haven't reached with our local contribution. So I think that will be accretive to our performance next year. And then the second part of the question was?

Gregory R. Badishkanian - Citigroup Inc, Research Division


Greg Creed

Yes, value. So yes, the one thing we want is that, I think, every 3 or 4 years, you have to reinvent value, you have to reframe value. There are -- there's always -- when I was having a discussion, there's 3 types of value. There's price value, abundant value and quality value. And you're going to be great at all 3 of those to be able to be successful. And so yes, we are out there testing right now, some price value reframing, which gives, I guess, be the next generation of Why Pay More? So that work is underway. The reason we didn't present it, it's early days. But as you would expect, we have to keep reinventing ourselves particularly around price value because it's no good just going back to the customer with something they already know. You can't just go out and tell the customer that I've got x for y price, and they've known that for 5 years. There's no compelling reason for them to come Taco Bell with that knowledge. So we have to keep reinventing ourselves.

Jeffrey F. Omohundro - Davenport & Company, LLC, Research Division

I have another question for Greg. It's Jeff Omohundro from Davenport. Greg, you outlined some significant cost savings in the new Taco Bell box, approximately 20%, including some significant cost in equipment and image. Wonder if you can talk a little bit about testing around that particularly in light of the efforts on throughput and menu extensions at Taco Bell.

Greg Creed

The really good news is we've actually built 3 restaurants, they have both new design. The last when I went up there was the new next generation design, which is in -- first one we built was in Sanger, Texas. So we built what we call a small, medium and large. We built -- the company built the Sanger, Texas store. The franchisee built a store in Denver and Commerce City in Denver. And then we just recently completed one in Redwood City in California. So the really good thing is we've now got 3 of those restaurants. We know the costs are what we set out to and get and what we're delivering. We also know that the operators are handling over throughput. We're actually seeing increased volumes in those stores, and the customer experience is actually superior to where we are today. So all I can tell you is we only got 3 of them, but having built a small and medium and large, one by the franchisee, 2 by us. It's meeting all of our expectations.

Tim Jerzyk

Do you have a question over there?

Unknown Analyst

Another one for Greg on Taco Bell. You talked a bit about the increasing ad the budgets and shifting to more of a national, I guess all national from local. Can you just talk about what are the advantages, disadvantages of going that route and why you wouldn't have done that years ago if that's kind a better way to go?

Greg Creed

Sure. I think that national is definitely more effective and it's definitely more efficient. I mean, if you think about when we have large agencies and local funds, the large part of that is being caught up in their fees. So we were paying national fees, but we were also paying to the -- I think, we had like 21 different agencies doing our local advertising, all of those we are paying for somewhere between, pick a number, probably 10% to 12%. Those fees go away, all the money go straight back into media. The best example I can give you is radio -- if we -- for the price of buying 23 local markets we can buy 1 national spot. That's the efficiency and the effectiveness we're going to get from the national advertising. So I think it's the right move. Our franchisees obviously believe it's the right move, and obviously, at the same time, it enables us to get into things like national Hispanic -- we're going to do terrestrial and land-based radio. It's a huge -- I mean it's sort of -- TRPs you're talking about TV will grow from something like 12,500 to about 18,000. That's a big increase.

Keith Siegner - Crédit Suisse AG, Research Division

Keith Siegner from Credit Suisse. One more for Greg. So you showed some really compelling slides in here in terms of customer perceptions around quality, in particular, and Cantina Bell clearly going to play a large role in this one. What I'm wondering is how pervasive is awareness of Cantina Bell at this time? Have you done those checks? And when you grow this advertising campaign next year, is this another whole leg to the store which is actually getting credit for it.

Greg Creed

Yes. The awareness of Doritos is about 85% and the Charles is just under 50%. The awareness of Cantina is less than 50% and Charles is only about 15%. So we think there's huge upside in -- to driving awareness of Cantina and also driving Charles Cantina. So we think that this is a big, long runway, and obviously, we've got innovation to execute plus the incremental media, so I would agree with your assertion.

Keith Siegner - Crédit Suisse AG, Research Division

And if I can sneak in one other quick one. Now that you have a new franchise agreement in place, does this change the approach to maybe taking that new franchise and targeting 16% company, maybe a little closer to maybe some of the other brands, in other words, does that mean your relationship change your willingness to refranchise.

Greg Creed

I'd like the question on the other hand back to my boss.

David C. Novak

Now we -- that wasn't a based on what the media spend was. We think that's right from a shareholder value perspective that we think we're better off of running those restaurants. We obviously look at that continually, but we think based on what I've seen, we think that 2013, we're going to be done with our U.S. refranchise. I don't think we're going to be at the level that we think are appropriate, which is really what we set out a while back.

Unknown Executive

One of the reasons why we like having some company ownership is that you can lead the system. And so if we scale back at KFC and Pizza Hut, we still own where we can lead the system, test markets whatever. But the thing that we're really focused on around the world and -- is operational excellence, we've made that the #1 priority that we have for our company. And when you own stores, one thing I would tell you about Greg and the team here with the job that they've done on operations, if we have an underperforming franchisee, we have no qualms whatsoever buying those stores and then selling them back to a franchisee. So we can buy and flip, and we've done that a few times, quite successful, turned around the New Orleans market, big time. And -- because we're building the operating capability to do that. That isn't something that we necessarily are planning to do, but it sure gives you a lot more power when you're trying to build your brand, build your system and drive operational excellence.

Alistair Scobie - Atlantic Equities LLP

Alistair Scobie from Atlantic Equities. One for Niren perhaps on India if I can. Obviously good growth both in store margins, and obviously on cash margins, how should we think about this going forward. You're still below China, obviously. Could you just talk about some of the structural differences there, whether there's any impediment to sort of continued sort of pace of growth on the margin side, and where we should think about that margin going?

Niren Chaudhary

Well, I think India, structurally, one of the -- when you compare the 2 countries, I think one of the areas where we are behind us on the amount that is spent on infrastructure and government. So as I understand, China spends 11% of GDP on infrastructure, India is about roughly half that, and that needs to go up significantly. So I think the infrastructure development is going to be a key driver of continued expansion. And the other one I think is also the supply chain capability in the country. And that being able to keep pace with the growth ambition that we have. So those 2 I think would be the key challenges for us.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

How do you see then getting the 20% margin someday?

Niren Chaudhary

So I think continue with the expansion that we have in place right now, I think we see, as we go out existing markets and we build more supply chain efficiencies at the back of that, leveraging our volumes more effectively and also we think there's a lot more upside on productivity gains across the peer, semi variables and label line and also cost of sales. So I do see the margins continuing to improve even as we grow over the next few years.

Unknown Analyst

I know another big driver Niren, will be the new sales layers you'll be adding. So as you're testing breakfast in KFC that you'll be able to leverage the fixed cost more significantly.

David C. Novak

But there's lots of margin improvement you can give a productivity as you build your scale. You saw that big time in China in terms of purchasing and distribution and so the more we build scale, efficiencies that he's talking about will come into play.

Tim Jerzyk

We have a few minutes left, Jeff has another question.

Unknown Analyst

Just, Pat question for you from a balance sheet perspective. I've asked Rick this in the past that will be -- funny this is your inaugural -- I'm just wondering if you could offer any color -- 2 things, one, just I think you mentioned the dividend you guys are comfortable at 1.5% to 2% yield and then the rest seems to go back in terms of share repo. We've seen others increase that dividend recently at the higher levels, just wondering how you think about that, first and foremost, balancing that versus share repo and then separately and obviously with a heavily franchised business, others have taken on incremental leverage, I didn't know if that was ever contemplated or pre contemplated whether it be that increased your regular dividend or accelerate share purchase or...

Patrick Grismer

Well, on the dividend, traditionally, we've increased our dividend at a level that is consistent with the increase in our earnings per share. We did go a bit further with this last dividend increase because our yield had declined because our stock had appreciated to such an extent. And we continue to target that yield of 1.5% to 2%, which we think is a very good place to be, very competitive for growth companies. But that's why we went ahead. I would say that going forward, our expectation is that we would at least continue to increase our dividend at a level consistent with the growth in earnings per share. With respect to the opportunity to lever up to complete more repurchases, right now, we're happy with where we're at, it is something that we look at from time to time. As David mentioned, with the BBB rating on our balance sheet, we feel we're in a good place as it relates to how we optimize the cost of borrowing with what a higher share repurchases could bring to the company. So we're not anticipating making any change at this stage.

Tim Jerzyk

We have time for one more question. John?

Unknown Analyst

I got question on Taco Bell, if I may. Can you talk about the ultimate opportunity for breakfast? And can you just put that in the context of migrating towards the national advertising spend, how you can support kind of breakfast on a local and regional rollout and did this -- so either slows it down or accelerate when you would have breakfast now.

Greg Creed

So, we're in 870 stores, as I said, pretty much breakeven mixing about 5% to 6%. What we're going to do in 2013 is we're going to do 3 market media test -- 4 media test. So social, all the stuff you would expect us to do, in 3 parts country, West, Central and East. We'll probably add a more few stores this year, but I think right now what we're really doing is working on growing the business that we bought in the West. And I don't really see this sort of have to go from the West to another part, to another part, to another part. Obviously, what we will do is we have massive intention of only being national in 2014. The other thing you may have heard recently is, we just changed our media planning agency. We just went to a new media playing agency, Sparks, public publicist up in Chicago. And the work that they've done will suggest that if move to national that we can actually fund the launch of breakfast within the media budgets that we've got and sustain obviously the balance of our calendar. So we feel very bullish that we can now do both. Does that answer your question?

Unknown Analyst

[indiscernible] last one [indiscernible] do you get funds for breakfast within your existing national segment [indiscernible] spend [indiscernible].

Greg Creed

Yes. Well, there's 2 things occurring. One, we're giving very good same-store sales growth, which obviously leads to increase in the media budgets. Secondly, we're getting obviously with the amount of money we'd walk into the media marketplace, we've got very good deals from those people that we traditionally done good business with. And the new media planning agency believes that when they come on board with a different way of thinking how to play in media that we can actually execute both the launch of breakfast as well as sustain the balance of calendar support.

Tim Jerzyk

Okay. Thank you very much. Thank you for being up here for the questions. Thank you, everybody, for attending this year's investor update conference. And we'll have -- there's box lunches available outside. If you're leaving, feel free to grab one on your way out. If not, come back in and enjoy your lunch while we go -- we'll have our financial modeling session in a few moments. Thank you very much.


Steve Schmidt

Okay. Welcome back. Hopefully, you found the presentation this morning useful. It's definitely exciting, putting together and watching delivered and we're even more excited about the growth we have in our business today. My name is Steve Schmidt. I work in Investor Relations with Tim Jerzyk. And the rest of our Investor Relations team, I think was in the back. I like to introduce you to one of them, if I can find Jed Gold, is Jed -- Jed are you here? Maybe he's grabbing a bite -- we'll introduce him when he gets back. What we want to do now is actually take you through our financial modeling session and we're going to a little bit of detail, not only on the ongoing growth model of our company that Pat introduced with you earlier, but talk a little bit more about the specifics of 2013. So who I have with me today? We have Don Miller from my right, who is the Vice President of Finance in China. China business, he has actually been with Yum! for almost 15 years and he's been in China, based in Shanghai for 10 years now and runs plan there. Next to Don, we have David Gibbs, who many of you may know from the YRI Investor Day that we've had in Dallas. And David is the President and CFO of YRI, who's here to take you through the YRI growth for next year. And then Tim and Pat who we got this morning.

So before we get started, obviously, we have to go through the Safe Harbor statement, there will be forward-looking statements here. Please check out our Safe Harbor statement online at our website at yum.com.

Okay. Just to kick it off. Pat took you through our ongoing growth model a little bit ago in his presentation, but it really hasn't changed in a number of years. And I think you would all agree that it's actually produced very consistent quality results over time, and the good news is as we think that not only is done historically, but is in a great position to do that going forward. The one thing that you don't see on the chart today and hopefully you're as excited as I am about the India business after listening to Niren is that India will soon be a fourth bubble on this chart. So while not contributing meaningfully to our profits today, we do expect that to ramp up meaningfully in the next several years, and we'll go through that a little bit more detail. But now what I'd like to do is let Don Miller take you through the China growth model.

Unknown Executive

Thanks, Steve. [Chinese] It's good to be back in the States this week to take you through our earnings growth model next year and actually ongoing. It's really not changed since you've seen -- not really changed in the past since -- the last 12 months. 15% growth has 3 components in China. It's starting with our U.S. development growth. That gives us double-digit growth ongoing plus add to that combined with same-store sales of mid-single-digit, as well G&A leverage on our infrastructure and so forth.

So let's turn into the new unit growth. As you heard earlier today, we have -- we're very, very pleased with our track record of increasing our unit pace year-after-year. This past 2 years have been very much a function of our investment capability. We feel very good about last year, as well as this year's unit's going from 500 up to 800. And as we discarded already, we're very comfortable with 700, at least, for next year given what we see in our pipeline today. Obviously, we're very confident given our business model that we have the buildup, as well as our capability across, not just the top tiers, but all across deep within China, Tier 1 all the way through Tier 6, for more than 1 brand. We feel very, very good about that.

Moving over to the same-store sales chart, there's a lot of questions clearly on our same-store sales outlook, going forward. When we think of an economy growing 7%, as China is, as big as China is, with consuming class growing. We think mid-single-digits, 5%, 6%, 4% to 6% was very, very reasonable over the long run. And I think looking at the next year, we feel very, very confident and encouraged by our pipeline of innovation, both for KFC and for Pizza Hut, even for Pizza Home Service, which is starting to come up and be on the verge of growth and that's been actually our highest growth brand recently. So as we look ahead to next year, as we talked about, we have a slow start probably going in to the first part of the year. What we do expect is a growth model persist through 2013 for same-store sales.

And finally on the China margins. We are looking around 19%, excluding Little Sheep in 2012 this year. Do remember, we have increased our new unit development pace from 650 to 800. So with that, you have increased investments in getting the stores ready to open, labor investment, training, all that to get set up for a good growth rate next year. Looking ahead to 2013, we expect markets to be in the 19% to 20% range. So we expect, given our current pace of pricing currently in our run rate as well as in the next year, plus our inflation outlook which we'll go into more a bit little later which Steve will share with our commodities and later that we should be able to cover inflation with our pricing next year.

So with that I'll hand it over to David Gibbs for YRI.

David Gibbs

Thank you, Don. I usually try not to position myself after China in these kinds of things, it is hard to look good, but I think we've got a pretty good story on YRI, which I'll share with you today. As Steve mentioned earlier, our growth model for the YRI business is really at 10% operating profit growth model, it's the same information that we've shared previously at YRI Investor Days in Dallas. It's led by net unit growth of 3% to 4%, we love net unit growth because we can plant that seed in the previous year and it grows in the next year, with very good predictability. And that's historically what we've been growing the business, at 3% to 4%, but I'll talk to you about ways we're trying to increase that going forward. And then we also rely on some level of same-store sales growth more modest in the 2% to 3% range.

It says margin improvement and G&A leverage are moderate. I think that's a good thing that we're not relying on that in order to make our earnings growth, which you should know about margin improvement is that there's a lot of stuff going on behind the scenes. We've talked about all the work that we've done in the U.S., particularly at Pizza Hut in the U.S. on margin improvement. We are taking a lot of those methodologies to our international markets and actually seeing very good results with that. First market to kick that off was the U.K. market for KFC, they're actually planning on a decrease in their input cost next year as a result of that work.

So we've got a lot of stuff going on behind the scenes, if you don't have a lot of visibility to on margins, but it is something that is a big focus for us. And then similarly on G&A, we do have G&A leverage in our business, but it is unique in that when we enter new countries, we have to make a G&A investment. So we're constantly figuring out how, within this model, we can free up some expense dollars to go ahead and invest and enter new countries, which we know has huge payoffs down the road for us.

So that's the model. Digging a little bit more into the development piece, I guess we've communicated the 2012 performance of 500 net new units this year off of -- or approximately off of gross number of 950. We're really proud of that achievement, not the least of which is because we lost India, and yet we were able to lap our performance with India from last year, and India is removed from those numbers, but YRI included India in 2011 and was a little bit over 500, we're going to be able to get to a similar number this year without India. And I think it shows you as a lot of the presenters talked about, we've got a lot of opportunities to grow our business. If we can get the execution piece right, the right franchisees, the right operators, the right sites, we've got a really powerful growth model when it comes to development.

Of the 500 units that we opened, we opened them in 90 different countries. So you can see that there's a breadth it to where we're building, which is very encouraging. It means we've got growth opportunities almost everywhere we operate. Countries that we're not building in are ones that typically have 1 or 2 stores and it isn't the right timing. And then, of those 500 units, 2/3 of them actually came from the top 10 emerging market growing countries. So very big bias towards emerging markets, which is also good because those are markets where we know there's going to be a lot more opportunities going forward and we're obviously having success in those markets.

And then the final stat I'll share is that 2/3 of the stores are KFC's. The Pizza Hut business is about 1/3, we view that as an opportunity as has been discussed with the delivery model that we now have at YRI we think that can be something that will accelerate and grow going forward and you can see we're committing to a growth next year to at least the 550 net new units. So a very good story on development and really fueling the YRI growth model. We -- been talked about a little bit today, so I'm not going to belabor the point, but we are shifting -- we're sort of at an inflection point, we're shifting to become more of an emerging markets division of Yum! We're at that 50-50 point at the end of 2012, clearly, we'll be deriving more of our profits from emerging markets going forward as we can see a continuing acceleration in the amount of development and growth that we have in emerging markets. And in fact, as I talked about in August for those of you at the Investor Conference in Dallas, we're exploring ways to even take more equity in emerging markets and decrease our equity exposure to developed markets. We did that with the recent announcement of the transaction of selling our Pizza Hut U.K. dine-in stores, that significantly decreased our exposure to developed market. Actually, it helped our operating profit in developed markets as well. So that was a win-win all around.

And if you look at the growth model and just break it out by emerging and developed, you see the 10% model on the right. You'll see that we're counting on a collectively in total about 13% profit growth from emerging markets and about 9% from developed. Probably the first thing that jumps out of you on that page is 2% unit growth and 2% same-store sales growth doesn't typically add up to 9% profit growth. That is the function of the sale of the Pizza Hut U.K. business and that we have always said would be accretive and so it's providing us a nice benefit in 2013. We're actually going to invest some of that in some emerging market G&A, it's been discussed already that we're building some -- a better base of personnel in the Brazil market, for example, in order to grow our business there. One of the very large emerging market countries where we don't have much of a presence. So that's why you see the emerging market profit growth maybe a little bit lower than our historical numbers next year. That's simply because we've made some more G&A investments next year in emerging markets to plant the seeds for growth for many years to come.

And then finally I know that we've gotten a lot of questions in the past about margins, because YRI's margins weren't where we wanted them to be. As we've communicated, there is a significant benefit from the sale of the Pizza Hut U.K. dine-in restaurants. Not the least of which is I no longer have to answer the question about when are we going to sell those restaurants, which I've gotten from a lot of you. So that transaction is now behind us and we're projecting margins in the 14% to 15% range for YRI in 2013. Obviously, a big improvement from 11% just a few years ago in 2009.

So with that, I'll turn it over to Tim Jerzyk to take us through the rest of the business.

Tim Jerzyk

Thanks, David. It's exciting to hear that the YRI development is really picking up pace, to see the 950 this year, and at least 950 next year. And looking at it from a 90% franchised business, I think that's a pretty good indicator of the health of our brands around the world.

So turning to India, I mentioned earlier that India does not contribute meaningfully to profit today, in fact, it's a little better than breakeven this year. It will be better than that next year, we'll make a few million dollars in India, but as Rick mentioned, we're definitely building this business for the long-term. We're all in with all brands, and we have a structure in place to make sure that all 4 brands become power brands in India over time.

We have about 30% system sales growth in India this year. We are expecting that to grow by about 1/3 next year, so about 35% system sales growth next year with opening over 150 new units. So KFC will be the catalyst of this new unit development. We're also seeing Pizza Hut dine-in, as well as Pizza Hut delivery, and maybe a couple of Taco Bells to make up that over 150. We're also putting equity into the market. We added about 40 equity KFC restaurants in 2012. That number will go up by about 50% next year. So, we continue to increase our equity presence in India.

From a U.S. profit standpoint, our ongoing growth model assumes a same-store sales growth of at least 2%, and modest margin improvement in G&A leverage to get the ongoing target of about 5%. Now for 2013, we have several things going on in terms of timing and one timers, you had, in the second quarter of the 2012, we had a $17 million legal expense, that should be a tailwind for us going into 2013. However, we are expecting about $15 million in the incremental pension expense to potentially offset that.

The other item that we mentioned in Pat's presentation -- that Pat mentioned was, that we have a tailwind of Taco Bell re-franchising, that will actually hurt us to the tune of about $15 million in 2013. And with that in mind, we're expecting the U.S. business to grow slightly slower than our ongoing model at about 3%.

We talked a little bit about refranchising. What you see is, at the end of this year, we'll be at about 11% company ownership in the U.S. Next year, we had some work to do on Taco Bell, it's about 200 restaurants that will generate about $200 million in proceeds and then take our company ownership down to about 10% as a total U.S. division. So you'll notice that we are keeping a lot higher ownership percentage of Taco Bell, and that's part of the reason that you'll see that Taco Bell drives about 60% of our overall U.S. profits and we expect that to continue to 2013.

So let's move in the inflation. And I'll go through China and the U.S. inflation numbers in a little bit detail here in just a minute. But overall, we're expecting inflation on the commodity side in China to be about 3%, with mid-teen labor inflation as we continue -- the China economy continues to rely on the 15% wage increases as per the 5-year plan that is really aimed at increasing consumer wealth and spending. And YRI, we're expecting food and paper to be about 2%, with mid-single-digit labor inflation, and finally in the U.S., inflation of about 2%. Now keep in mind, on this U.S. number, this is about half of what it would have been without the supply chain initiatives that we had throughout the business in 2013. So we're really happy with the way we've been able to offset this inflation and it really allows us to price less -- price less in a certainly competitive environment. And on the labor side, we expect low single-digit inflation in the U.S.

Moving on to China. We expect food and paper inflation to be about 3%. And these categories below represent about 60% of our spend and we're expecting chicken to be in the 3% range, with other meats and seafood to be about 5% and season dairy to be about 3%.

So moving to the U.S.. The components of the 2% inflation that we're expecting. Keep in mind this is for the equity portfolio that we have. So that will influence the mixed numbers that you see when you see beef in the mid-20s and cheese and chicken in the low-teens. We're expecting the highest commodity inflation, as Rick mentioned to be cheese at the high single-digit percentages this year.

So moving to some other assumptions for 2013 from a G&A standpoint worldwide, we're expecting about 3% increase, and this is entirely driven by China. So as the system grows, the infrastructure grows, the 3% increase will be essentially from China, and then some in emerging markets that David gave us a mention at YRI, as well as some savings from the Pizza Hut U.K. transaction and U.S. we expect to decline slightly. From a financial strategy standpoint, we are expecting our tax rate to go up to 27%, and we expect that similar rate in 2014 as well. We expect share repurchases to add about 2 percentage points of EPS and earnings are expected to be flat. And from a ForEx standpoint, we really expect a neutral year in 2013, with some benefits from the R&D, offset by YRI.

And finally from a capital perspective, we expect about -- to invest about $1.1 million in CapEx into the business in 2013 led by, as you might expect, the China division, with at least 700 new units, as well as substantial remodel activity. And finally, and moving to YRI, about $300 million, the bulk of which is actually in developed markets, with markets like France and KFC in the U.K. And then finally in the U.S., about $200 million. So in addition to India, of about $30 million give you to CapEx forecast at about $1.1 billion in 2013.

So with this, what we'll do turn is we'll turn over to Q&A. We have some microphones throughout the room and we'll take your questions in turn.

Tim Jerzyk


Unknown Analyst

Can you expect the pricing to offset, in relation to [indiscernible] China, [indiscernible] overall [indiscernible]

Tim Jerzyk

If you think about the inflationary environment, in China next year, we're expecting about 3% commodities. That's about 1% price rise, you would need to offset that. And from a 15% labor inflation, it would be about 2.5 points. So we need about 3.5 points of total pricing. So, if you look at where we are heading into the year, we have about 3.5% to 4% of price, heading into the year, that'll expire midyear. So we have to take some additional pricing to offset that, we will continue to keep an eye on the commodity environment, as well as other inflationary environment, as well as our brand measures, to see when that makes sense to do. And, Jon, you may have some more to add on that.

Jonathan D. Blum

I think you covered it pretty well, how the parts work. And we're still going to continue to use our new strategy. And the pricing, where we're not is, say, taking a total national one-day price increase, but we're going to be much more thoughtful by trade zone, which I think is working very well for us this year, as we went through the middle part of this year, a new pricing strategy.

Tim Jerzyk


Unknown Analyst

The supply chain stock in the U.S., is that just UFPC, just that purchasing cooperative and the company working better to -- I mean, how does that all kick off? Because that is a separate part -- it's separate from Yum! in some respects, right?

Tim Jerzyk

Actually, two different things happening in supply chain. You're correct, it's almost entirely through the UFPC, which is the cooperative buying organization, that services both company and franchise restaurants. The savings are being derived through what we call sourcing events, as well as specification modifications. On the sourcing events, what's happening is that there's a much more robust process that is followed when we go out to market for a particular product. So I would just say just say, just better, tighter practices around that. Making sure that we are leveraging competition in the supply chain to get the prices possible, for the quality of product that we're seeking. That's part of it. The other part of it is that we are revisiting specifications, in some cases. In a lot of cases, improving the quality, but just being more thoughtful about how we expect the product that we need to go into what we make in each of our restaurants. Finding opportunities for efficiency. And probably one of the best examples of that is the Pizza Hut delivery box, which was redesigned last year, offering a comparable quality product that actually had some better functionality, and with it a substantially lower cost. So it's really through a combination of those efforts and that is most entirely through UFPC.

Tim Jerzyk


Unknown Analyst

These are two questions on China. One is just on the labor inflation, the mid-teens. Is that the government mandated? Is that simply -- you're paying minimum wages or is that a labor scarcity issue? And then can you talk about the mitigation things you're going to actually lower that in the long run? That's questions one. And secondly, there's a lot of discussion earlier about the erosion in margins in Tier 1 cities in China, the restaurant level. What were the -- how much erosion did we experience? How many hundreds of basis points, is that bad actually?

Tim Jerzyk

On the labor, as Steve mentioned earlier, the government, it's latest 5-year plan, which started, I think, a couple of years ago. They made it very clear they want to increase the income of the lowest earners and basically double their incomes in the next 5 years. So we're in the middle of that right now. And that, if you do the math, about 15% per year. So that's sort of the easy math on how that works. Clearly, as we go through that, we look to adjust our wages to be in line with those that are mandatory, based upon minimum wage by region, by province. And also, at the same time, we'll work on productivity around labor in our restaurants. On the second question, which was on Tier 1 economics, Tier 1 margins. We really don't guide, too much, in terms of the number on that.

Tim Jerzyk

Yes. In terms that -- John, I think if you recall, between earnings calls and different events we've had, I think even in this one last year, we've been basically citing T1, T2, the higher tiers, especially T1 margin erosion due to higher wage rates, higher rental costs. So it's been over a couple of years, basically, maybe 18 months, that we've called it out. And it's been several hundred basis points. But, as Pat said earlier, and we gave you, I think, the unit economics for T1 and T2, they're still really good. They're basically, I think, a 4-year cash payback. So it's lower but it's still very good.

Unknown Analyst


Tim Jerzyk


Unknown Attendee


Tim Jerzyk


Unknown Analyst


Tim Jerzyk


Tim Jerzyk

Mike, let me just -- go and get back here and then -- Michael, go ahead.

Paul Westra - Cowen and Company, LLC, Research Division

It's Paul Westra at Cowen. Some questions on China. You gave us about 6- or 7-basis point differential on margin between tier 1 and 2s versus tiers 3 through 6. You mentioned labor and rent. Can you breakout which is bigger, between labor and rent, that makes up that 600 basis point gap? And then inflation rate for rent and labor also running higher in the tier 1 and 2 markets or is inflation about the same?

Tim Jerzyk

The spread between the tier 1, 2 versus the lower tiers, pretty even between labor and rental, from a spread perspective, on that gap there. That can vary by store, by restaurant, based upon the sales volume, based upon the rental contract we have in that. Your second question was around?

Paul Westra - Cowen and Company, LLC, Research Division

The labor inflation rate amongst cities.

Tim Jerzyk

It's really across-the-board, in different parts. It can vary by timing and extent. But, generally speaking, as you -- over time, over the 5 years, you would expect it to double. That's what the government, from Beijing, has issued in terms of a decree for this to occur. But it can vary by region, by timeframe, because it's not necessarily executed at the national level, it's really done more provincially.

Paul Westra - Cowen and Company, LLC, Research Division

And how about the rent inflation rate. Is that about the same too?

Tim Jerzyk

Rent inflation rate, really, is very -- not just even across tiers, but even within the same city, based upon if it's central versus -- it's really supply-demand. Central versus outskirts, if you will. First floor, lower floor and shopping malls versus different. It's really all different. There's no like real clear pattern of, okay, it's all happening more on tier 1 versus lower tier and so forth.

Michael Kelter - Goldman Sachs Group Inc., Research Division

So, two questions. And since they're totally separate, maybe I'll just ask one and follow-up. First is, the gap between gross and net new openings in YRI is pretty wide. I was hoping for you to maybe bring that to light, whether closures are. Because 400 or 450 a year means that -- I was doing some back single math, like 25%, 30% of every YRI unit will close over 10 years.

David Gibbs

I guess there's two things that go into that closure number. One is that we're closing stores to relocate them. More so than in the U.S., we tend to have shorter leases in international, and in-line stores that are easier to relocate. So, they're not all closures that are occurring, we're closing to relocate. And there are some straight closures. If you want to dissect that a little bit. We've been closing more dine-in Pizza Hut restaurants than anything else. But we've now got a strategy to go into a lot of those trade areas and reopen as delivery unit.

Tim Jerzyk

More developed.

David Gibbs

And certainly more developed markets than emerging.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then the other one was the Pizza Hut U.K. divestiture, which it looks like about 100, 200 basis points of accretion. Can you maybe help us, a little more granularity, with where that flows through below the revenue line? And where should we see this step up?

David Gibbs

I don't know about granularly, but maybe at a high level. We're getting some SG&A savings. I think, as we've previously communicated, we'll have to take a charge in the fourth quarter, related to some closures. Now we get to lap that. So we get upside from the G&A savings and from lapping. We also get upside from the stores being run as franchise and paying us a royalty. Since they were low-margin stores, there's a benefit to that.

Tim Jerzyk


Unknown Attendee

Maybe a question for John and the China business. The chart that showed the CapEx spend for next year. Looks like 25%, you mentioned, for remodels. I think, the slide that showed this year, you recently did like 300 stores. I'm just wondering, the 25% of the $600 million that you're looking for in '13. That's $150 million. I'm just wondering, how many stores you're anticipating that to be? I'm thinking, as the system gets larger and older, and more mature, you might still be on the ground floor, but the system has been around for a while now. So a lot more stores, I would think every year, would come up for this, which might help comps. I'm wondering if you can give any color, in terms of the cost or the sales lift of the returns or what percent of your system is remodeled. Just how you think about that base and how many stores we should expect going forward.

Jonathan D. Blum

Right. This year, as you saw it -- as we showed in our earlier slide, we had 300 new models. But, really, part of our commitment to keeping asset upgraded over time. It's not just China, but I think it's more the global emphasis on our brand building. We still have a -- we actually have a team in China, that looks after asset management, we call it. They go after lease renewals and make sure it's still the right price for us, as they renew that term. Clearly, we've taken the fact that we want to keep the brand asset upgraded. Our spend assumption for next year is $150 million in our CapEx, for remodels. So we expect to, at least, do 300 next year, remodels. As you said, as see pointed out, Jeff, we do have a more units graduating to that kind of window of being they're upgraded as we go forward. So we'll bake it into our CapEx going forward.

Unknown Attendee

I don't know if that's all for remodel, that's how it implied. Like a $500,000 or are there other costs? If you're going 300 for $150 million, what's the sale lift you might get off of that?

Jonathan D. Blum

Jeff, there is maintenance expense in there, like you'd see in any business, like HVAC and that type of thing. But think about a remodel in China, a lot of higher percentage, of the new unit, can be seen in other places in the world. So, remodeling in the U.S. may cost lower. 1/3 of the cost, of a new build in China, is much higher as a percentage.

David Gibbs

The reason for that is we're not building free standing, most of our stuff, you're talking about some type of four-walls. So, as we go in and we take a very clear, a very detailed look at -- I want to reconfigure the back of the house, front of the house, seating arrangements. We did pretty -- we don't go in there and try to cheapen it. We go in there and make sure we get the brand up to where it needs to be. In Shanghai or Tier 1 or Tier 2, we'll adapt, depending on upon the trade zone we're in. But, on average, we'll spend more -- a relatively risk -- low investment in China than what you would pay in the U.S.

Unknown Attendee

Is there an average lift? Would you share what the average lift would be?

David Gibbs

Average lift. We do get good lift. It really can vary. It's really hard to isolate impacts of individual events. But we do usually see something in the mid-single-digits to high single-digits lift.

Tim Jerzyk

Gentleman over here. Do we have another, John?

Unknown Attendee

A question on YRI. I heard, at one of the presentations, about France average volume being around $3 million. I mean, did the number used to be $4 million? Maybe I'm just remembering this like way, way out of context. So if you can just help me understand, I mean, if there has been a change from kind a $4 million to a $3 million on average volume and what the impact is, of the newer units, or whether it's just coming off a honeymoon, what-have-you? And I have a follow-up as well.

David Gibbs

Yes. I think the new units that are coming on in France are performing well, and as Rick had talked about, every one of our GMs is all over the details on new unit performance. And in fact, we've had situations in the past, in France, where we slowed down new unit development in order to catch our breath and make sure we were opening units right away. So that's not the case. In terms of the absolute unit volumes. That number called my attention as well. I'm not sure that, that was the exact right number, but I don't know that we're -- we'll get into all the details on that, but sometimes the Spain units get blended in the French units because they run them both. There's a couple of details underneath that. But there shouldn't be in any cause for alarm, there's no -- I don't you how you want to communicate that, but we're managing it. So part of it is the management or in how we've organize. We made some changes in Western Europe where, frankly, we love the way our management team in France runs the business, so we're trying to leverage that across different business units. My guess is some of the data got confused into that.

Unknown Attendee

Okay, understood. And then secondly, I mean, you did talk about increasing some, I think, company ownership in emerging markets. I mean, could you kind of elaborate on that? I mean, do you begin to codevelop? Do you potentially buy some markets that franchisees are operating in? What markets, that's even hypothetically, might those be?

Unknown Executive

I'll talk about that theory. The two ways we could do that. One would simply be building more aggressively in emerging markets that we're in today. One thing we constantly are doing is looking for great opportunities to invest our capital, and if we got 2 or 3 year cash paybacks, we're going to step on the accelerator. So, we're doing that in market what we've talked about today, like Thailand and Russia, where -- it's still early days, but the units that we're opening are giving us really, really strong returns. So, our equity is going to go up simply because we're going to start building more aggressively than we have in the past, in markets like that. We've also done things that you've seen, like take an equity presence in a market like South Africa. And you'll probably see us do more of that, where we actually go in and buy units in countries where, today, we don't have a presence in an emerging market. We get a foothold to play more of a leadership position with the franchise community, and also to take advantage of when there's great unit economics so we can make a lot of money. If we can get China-like returns in other markets, we're going to go after that.

Unknown Attendee

Questions on timing of pricing in China. A year or so ago, you rolled out value during the height of inflation. And then this year you have pricing of 7 and 5 as inputs are coming back down. So the timing, arguably, for pricing in China, has not been one to minimize cross price elasticity. Doesn't mean you have a long-term brand right value issue, it just means you're not in lockstep with the other price movements in the market around you. Has there been a recognition of that at Yum! China? And maybe thinking, now that we've rolled out all value menus, let's hug that inflation a little bit closer so we don't give ourselves a heart attack here.

Unknown Executive

Well, David, as we said, we've taken a very different look at how we get pricing. We're very much more involved in our field organization out there, really get sensitized to the consumers out there. The consumer elasticity is not just one Chinese consumer, there's different types of income groups. The new cities that we go into, we're going to have a different value program there, over the long run, future-backed. We're adapting our business strategy in terms of pricing, based upon tiers, based upon trade zones. So, I think, going forward we feel very good about this new approach. We're going to not -- again, a year or 2 ago, everybody said, okay, May 1, we're going to take 3 points of pricing in China. We're not looking at doing that anymore. We're looking to do it more methodically, with analysis. We'll do it, say, in phases. This year if you recall, we did it in like 6 phases, Q2, Q3. And we're really ready. One of us is going through that, to desensitize ourselves, feed that back. And this is kind of like the areas of our development process. If we do actions, take decisions, want to make sure we learn from doing that. So, we'll always adapt that as we go forward.

Tim Jerzyk


Jason West - Deutsche Bank AG, Research Division

Yes. In terms of the release last week, can you talk a little bit about how broad-based the slowdown was in China, that you saw through mid-quarter? Was it cross day-parts and a little bit -- sort of equal across Tiers as well? And then second question was on the sort of unit outlook for the KFC. You talked about sort of dialing back some of the Tier 1 store growth. Can you talk about how many Tier 1 and 2 KFC you would have opened in 2012? Just so we can get a sense of how many those aren't going to be there next year.

David Gibbs

Well, in terms of the weakening in sales, what we will tell you is that it was broad-based. There was no geographical dispersion, disparity, whatever word you want to use. It was across all tiers, all geography and all brands.

Unknown Executive

The second part of your question was Tier 1, 2...

Unknown Executive

I don't think we're going to do that one.

Unknown Executive

The second part of your...

Unknown Attendee


Unknown Executive

Well, we've been -- I think you've seen, in the slide before, we have, basically, 50-50 for KFC. Tier 1, Tier 2 versus Tier 3 and below, 50-50 split.

Unknown Executive

Yes. Actually one of my earlier slides, so it was -- even as of right now, we're still 50-50, if you group Tier 1 and Tier 2, and then Tier 3 and below. We're still 50-50. That percentage has been holding pretty steady for the last 3 years. So we're not -- I think there is a slide in the back, in the appendix of the book, that has it by tier. So you take a look at that. But we've clearly been building -- and we're still going to be building and we said we're going to maintain our competitive advantage. The point is, we're just going to be more selective about it. And the good thing is, it's because we have this huge opportunity, as the government is investing more in infrastructure inland, there's a definite plan about that. That's in their 5-year plan. And lowered tiered cities, move to lower tiered city emerged -- unit economics are fabulous. So, between that and the new cities that we -- I think, within our September presentation in Xi'an, China. So there's this tremendous opportunity. We're not like vacating Tier 1. We've got a very good lead there and we plan on keeping it. It's just not going to be as significant a proportion of the overall development because we have these other opportunities. And also, part of it is because Pizza Hut, because we're taking Pizza Hut to the lower tiers as well, rather than just -- that's been a brand that's been basically in just the Tier 1 and Tier 2.

Unknown Executive


Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

Wanted to follow up -- one on China and then one on YRI. On China, I think the numbers you're giving, about the price increases, you'd need to offset inflation at each of those, for those line items. It holds profit dollars flat but the profit rate goes down. So, can you just talk a little bit -- I mean, is the expectation -- you would take more price or is there some traffic built in or cost savings there? And then the other piece is just about YRI. Comps have always, since recently, been running ahead of that 2% to 3% percent rate. Should we interpret that, if they stay that way, there would be reinvestment of any upside or is your signal about kind of any trends you're seeing?

Tim Jerzyk

I'll take the first question and, Don, if you want to add anything to it. So the question, as I understand it is -- so the numbers we talked about essentially keep profit dollars neutral. So you'd have to do -- at least have transaction growth beyond that or efficiencies through the restaurant productivity initiatives, whatever, to actually grew the margin. We're expecting the margins to be 19% to 20% next year, in that range. But there's a lot of moving pieces. In commodities can wind up better, sales could be stronger. But that's, generally, how we look at it, in offsetting inflation. Just to put in perspective. And then, David.

David C. Novak

Yes, on YRI same-store sales growth. The challenge at YRI is, not all same-store sales growth is created equal. Where we have equity exposure versus where we don't have equity exposure. So we can years where same-store sales growth is good, but our equity markets are down, and that challenges our profit or vice versa. So, yes, we're constantly looking at -- if we over delivered, are there opportunities to reinvest that money or should that money flow to the bottom line. But it's a complicated equation, I couldn't give you an answer at anytime, moreover we would -- you would expect us to accelerate long-term investment.

Tim Jerzyk


Unknown Attendee

My question's on the U.S. inflation outlook. You talked about some supply chain to offset some of the cost pressures. Just what jumped out at me is that you're expecting cheese to be up 8%. Is that a forecast or have you been able to lock that in? And the drivers behind that inflationary forecast versus beef and meat. I guess, primarily beef. As well as -- there's a lot of inflation, on tap in the beef market, yet that's a lot lower rate than the cheese inflation. Is that due to more spec improvements on the beef side? Any comment on all the above would be great.

Jonathan D. Blum

All right. We won't break down all of the supply chain initiatives by category. But in terms of your first question, is it a forecast? It is. But for the main commodity in the U.S., we're essentially locked in. Ballpark, just through the first quarter, on the main components.

Unknown Attendee

Just a follow-up on Sara's question. So price rolling off in the first half kind of implies that you have 0 pricing in the second half. Do you assume, in your guidance, that you take an incremental price increase in the second half, in China?

Jonathan D. Blum

We always evaluate it, and the team will evaluate it and look at the brand measures and take it when it's appropriate.

Unknown Attendee

Yes, so it is assumed in your guidance?

Unknown Executive

Assumed in the 19% to 20% margin?

Unknown Attendee


Jonathan D. Blum

The team will manage the pricing to achieve that. That's what the target is, and I guess, that early it's a combination of multiple variables to get you there. We're not going to say how much pricing we're going to take. The team will evaluate and make the best call when the time comes.

David Gibbs

Yes, I think the best way to say this is we're anticipating covering inflation next year with pricing, and yes, part of it will roll off in the middle of the year. That's all we'll tell you.

Unknown Attendee

Two questions. I apologize if either have been answered. First is, if -- the business in China, is that at all impacted by a recent headlines of the accounting firms in the JVs in China? And then, secondly, the unit economics Tier 1 and 2 versus 3 and 6. Could you explain why the cash investment is higher in Tier 3 and 6 for both concepts? It's marginally higher, I would expected it to be lower. It may be size, it might be logistics. I have no clue.

Unknown Executive

I'll respond to the question on the accounting firms in China. At present, there's no impact to us. And I think, as you're aware, the inquiries surrounds Chinese companies who are listed in the U.S., and an ongoing debate between U.S. regulatory agencies like the PC, NELB and the SEC, and their counterparts in China. We'll see how long this debate continues. I suspect it will last for some period of time and it'll reach some resolution as to what they feel is an appropriate level of sharing, amount of work papers and what bearing that has on auditing firms that are retained by U.S. companies to audit their Chinese subsidiaries. We have been using an affiliate of KPMG since the very beginning. KPMG has not been named in any of these inquiries. In the highly unlikely event that there is some impact to the auditability of our Chinese business because of the arrangements we have currently, the practical solution for us would be to use KPMG or whoever our auditors that assign their U.S. staff to go over and audit the books of our China business. There's no impact to us today. It's impossible to predict whether there will be an impact. But, again, in the likely event that you have the extreme outcome, there's a practical solution to it. So we don't see that having, really, any impact to us. If we were to go down that path, there could become cost impact but it would not be material.

Unknown Attendee

On your CapEx comparison, between the top tier and the lower tier. It really comes back to, as you heard earlier, we go after the best sites. And every time we enter a new city or expand in those lower tier cities -- we've been many years ago in China, the top tier cities. We're doing more of that in the lower tiered cities, and those typical is kind of -- I call them flagship sites, tend to be a bigger footprint, on average, than would find, say, today in the top tier, where you have competition for space. It's getting crowded in some of these trade zones, for footprint.

Tim Jerzyk

We have one more question?

Jake R. Bartlett - Susquehanna Financial Group, LLLP, Research Division

Jake Bartlett from Susquehanna. I had a question on the labor inflation in China. I think in the third quarter you mentioned 8%. One, is that correct? And is there a certain ramp up to the 15% you're talking about for 2013?

Unknown Executive

Yes, our guidance those is 15% the next year. It can fluctuate in between quarters, here in there. But on the full year, we're looking at mid-teens range.

Unknown Executive

But there has been a kind of a short-term dip into the fourth quarter and possibly the first half of the year. Is that how we should think about it?

Unknown Executive

There could be movements depending upon the timing of, say, regional -- in a ways, legislation. It's not for every quarter, every month. It's flat, even. But over time, we expect it to be up in the mid-teens range.

Tim Jerzyk

Just before we wrap this up, if I could just introduce two people. I tried to do it little earlier but Jed Gold is Director of Investor Relations back here. So if you could say hello to him. And Susana Arbala, in the back, over here. If you could raise your hands, Susana. She just joined our team too, so a few months ago. Introduce yourselves. I think with that, we'll wrap the day. So, thanks for coming, and we appreciate your interest in Yum! Brands.

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