Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands Fourth Quarter 2010 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.
I would now like to introduce Tim Jerzyk, Senior Vice President, Investor Relations. My Jerzyk, you may begin your conference.
Thank you Nicole. Good morning everyone and thanks for joining us. This call is being recorded and will be available for playback. We are broadcasting the conference call via a website, www.yum.com. Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording.
I would also like to remind you that this conference call includes forward-looking statements. Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to the Investors section of the Yum Brands website to find disclosures and reconciliations of non-GAAP financial measures that may be used in today’s call.
Finally we’d like you to be please be aware of the upcoming investor events, Thursday February 17th, we will host the Taco Bell investor day in (inaudible) California. Wednesday April 20th, first quarter earnings will be released. Our call today, you will hear from David Novak, Chairman and CEO and Rick Carucci, our CFO. Following remarks from both, we will take your questions. Now I’ll turn the call over to David Novak.
Thank you very much Tim and good morning everyone. I am especially pleased to announce that 2010 was one of our best years as a company. We reported 17% full year EPS growth, excluding special items marking the ninth straight year that we exceeded our annual target of at least 10%. In fact, 17% EPS growth is our best ever and what makes us even more impressive is that it was driven by a 15% increase in operating profit including gains across all three of our business divisions.
As I look back on the past year, I’m really proud of what we accomplished. We opened nearly 1,400 new restaurants outside the US while making steady progress building incremental day parts and sales layers in each of our business.
We improved worldwide restaurant margins by 1.3 percentage points. And I am pleased that over the past two years we’ve increased worldwide restaurant margins by threefold percentage points. Operating profit grew 15% prior to foreign currency translation and special items. And importantly, we maintained our return on invested capital of 20% plus and remain an industry leader.
Our strong cash flow generation combined with our disciplined approach with deploying capital allowed us to increase our dividend 19% to an annual rate of $1 per share.
We are particularly pleased with our China business which reported robust profit growth of 26% for the full year excluding the impact of foreign currency translation. At Yum Restaurant International YRI, we grew operating profits 11% excluding the impact of foreign currency translation in spite of positive but sluggish system sales growth. Our US business also grew operating profits, reporting a 3% increase for the year.
Before I take you through our key strategies of results for each division, let me start by thanking all of you who attended our investor and also grew operating margins reporting a 3% increase for the year.
Before I take you through our key strategies and results for each division, let me start by thanking all of you who attended our investor and annual day in past December in New York. I look forward to that meting every year because it set the tone for the coming year, more importantly its gives us the opportunity to go public with our goals and commitments as well as showcase our management talent from around the world. In case any of you miss this meeting, you can find the presentations on our website at yum.com.
Now onto our strategies, let me start with our China business, where our strategy is to build leading brands in every significant category. We grew profits by a whopping 26% in 2010 prior to our foreign currency translation. I am proud to report that in the last three years, our China business profit has more than doubled and we expected to become our first billion dollar profit business in the very near future. Our recipe for success is continued profitable new unit development and leveraging our existence assets with new day parts and sales layers to grow same-store sales.
In 2010, we once again opened over 500 restaurants in China including 262 in the fourth quarter. That is obviously an extremely impressive accomplishment. (Inaudible) and his world class are clearly delivering dynasty like performance for each of our brands.
Our KFC business has been absolutely rock solid. We now over 3,200 KFCs in China and continue to see cash paybacks in less than three years on new restaurants. KFC had 414 new locations in 2010 and made good progress leveraging its assets with 24 hour operations, delivery service and continued building, a solid breakfast business. Our growth in results were driven by increased traffic. We continue to be confident in the strength of the KFC brand in China.
Now on to Pizza Hut, Pizza Hut Casual Dining in China had a breakout year generating double-digit same-store sales growth in every quarter of 2010. We have more than 500 restaurants in over a 130 cities and we added 60 new locations in 2010. Additionally, operating profit grew 50% and Pizza Hut Casual Dining now generates well over $100 million in operating profit. Our strategy to revamp the menu every six months and continue to offer compelling value is truly paying dividends. Given our dramatic sales growth, the unit economics of the Pizza Hut Casual Dining concept in China are even more scalable setting us up for significant growth ahead.
We also continue to invest to behind development of our merging brands. Pizza Hut Home Service now has 120 units in 11 cities. East Dawning, our Chinese fast-food brand continued to make progress as we drive for scalable economics. Additionally, we own 27% of Little Sheep, the leading brand in the hot pot category, which is the largest casual dining category in China.
In summary, anyway if you look at it, our China business had a stellar year. More importantly, I couldn’t be more bullish about our future growth opportunities. We know we have established category leading brands and we have a world class management team driving the business forward. We continue to believe we are in the early innings and on the ground floor of growth in China.
Next, Yum Restaurant International, where our strategy is to drive aggressive international expansion and build stronger brands everywhere. YRI delivered 11% full year operating profit growth and ended the year strong with 18% growth in the fourth quarter both prior to foreign currency translation. Driven by franchisee development, we opened 884 new units in over 75 countries including 548 in emerging markets. YRI now has 6,350 restaurants in emerging markets across 67 countries, a level that is unmatched by any competitor. This impressive unit growth is the most obvious sign of the health of our brands internationally.
Importantly, we made major progress creating new growth vehicles by investing in India, Russia and Africa as well as beginning to develop Taco Bell into a totally, truly global brand. 2010 was a milestone year for India, particularly with the KFC brand. We suppressed 100 units, had terrific sales growth and now have very good unit economics. This gives us the infrastructure and scales to fuel aggressive growth going forward.
In Russia we made an acquisition that gave us full management control of the KFC Rostik brand, giving us a 150 restaurants in total. Now, I have to tell you, we are very excited to have over 100 KFCs in both Russia and India. Remember, it took us 10 years to get to a 100 units in China.
In Africa we already have a dominant market position in South Africa with over 600 KFCs. As we shared in our New York meeting, we’re now expanding throughout the continent. Our franchise partners are building restaurants in Nigeria and Ghana as well as East Africa and we’re extremely happy with how well customers have taken to the KFC brand and how enthused our franchisees are about the opportunity ahead.
We are also making progress developing Taco Bell. We have entered ten new countries in the past two years. We are building more and more confidence Taco Bell can become a truly global brand. YRI also made progress leveraging our existing assets and building incremental day parts and sales layers, we aggressively expanded our Crushers line of frozen beverages at KFC and we’re going hard expanding non-fried throughout the world. We continue to make progress testing breakfast.
It’s going to take, it’s time to get these day parts and sales layers established, but this will ultimately give us the ability to drive our unit lines higher and ultimately our average unit economics as well. There is no reason why we can’t be a multi-day part, multi-protein concept outside the United States, where our only major competitor is McDonald’s, who has already shown us the way. That opportunity is ahead for us.
We are also very focused on improving our operating model at Pizza Hut. Our biggest initiative to do this is what we call channel separation. We want our casual dining restaurants focused on dining customers and our delivery restaurants focused on delivery and carry out. We think having both under one roof, produces a high degree of complexity and we intend to be more streamline going forward. Now in spite of all our optimism at YRI, I want to point out that YRI sales in 2010 were sluggish, the team is addressing this with stronger be year-ago innovation and value.
Finally, as we shift our resources to support high growth, high return businesses, we elected the refranchise our Taiwan and Mexico restaurants. These transactions as well as improvements in our company owned restaurants drove restaurant margins 80 basis points higher for the year.
In the United States, our strategy is to dramatically improve our brand positions, consistency and returns. We grew same-store sales 1% for the year including 5% in the fourth quarter and increased restaurant margins for the year. We also made significant progress on the refranchising front as we sold over 400 restaurants to highly capable franchisees.
Taco Bell finished the year on a high note with 4% same-store sales growth in the fourth quarter. Transactions grew each quarter of 2010 and were encouraged by the check momentum we saw in the second half of the year to complement our transaction growth. Like all QSR’s in a top environment, sales were not as high as we would’ve like and Taco Bell had to work very hard for these results. Taco Bell remains the category leader in value and as you know, we continue to provide healthy returns with high average unit volumes and strong margins.
The system also continues to contemporize itself with increased remodel activity. We also made progress testing breakfast, a new beverage platform and home meal replacement. Short-term, we expect to see a return on investments with our new dinner Taco packs. Longer-term, we expect breakfast to become a growth engine. We are working on these initiatives because our goal is to leverage our asset.
Now I want to address the recent loss we filed against Taco Bell. First, let me state that the claims made against Taco Bell seasoned beef are absolutely false. I’ve heard the plaintiff’s lawyers and press (inaudible) figures like 35% when the fact is Taco Bell seasoned beef recipe calls for 88% beef. Given these complaints we felt we had to defend strongly the brand and the quality of our seasoned beef. So we have used this opportunity to spread the world about our quality which is YR red, our advertising red thank you suing us. (Inaudible) did an excellent job setting the record straight and we’re seriously reviewing our legal options against those who made false claims about our products.
Now regardless how strong your brand is, there is no question, any incident regarding the quality of your food negatively impacts your image in sales. So clearly we are seeing a negative short-term impact. We believe we turned the tide with our aggressive response and we’ll wait and see the ultimate impact. We of course also had the headwinds of the weather across the US for all our brands to deal with in the first quarter.
Now, on the Pizza Hut. I’m extremely proud of the Pizza team for completely repositioning and restructuring the business. Pizza went from the worst to first in value ratings in the category. This was done by launching the $10 any Pizza promotion and following that up with the system wide initiative to provide everyday affordable menu prices. Pizza grew same-store-sales 8% for the year and is clearly winning on providing everyday value. Our restructuring is virtually complete as over 90% of our system restaurants are owned by franchisees.
At KFC, the business hasn’t changed from the yet update I gave during our December analyst meeting. We have a big job ahead of us and it’s going to take us time to execute our plans. As we move into 2011, we are going to focus the majority of our comments on the three growth drivers that make our company unique. Our leading brands in China, YRI’s dominate position in emerging markets and Taco Bell’s asset leverage in new unit opportunities. We believe with increased sales growth Taco Bell can go from its 5,000 units in the US to over 8,000.
All of this initiative, all these growth opportunities will drive our franchise fees and generate tremendous cash flow, shareholder (inaudible) and shareholder value.
So let me wrap this up. We had a great year in 2010 but we realized that 2010 is yesterday’s newspaper. We are working hard to make sure 2011 is another successful year and make it our 10th consecutive year of meeting our annual target of at least 10% earnings per share growth.
Now let me turn it over to Rick.
Thank you David and good morning everyone. In this section of the call I’m going to comment on two areas. First, I’m going to give some context to our 2010 results and then I’ll give a brief outlook for 2011. As David mentioned, Yum had a really strong year in 2010. What I want to do now still fact the annual overall and share with you how some of our key actions in 2010 change the position of our company going forward. The main topic I am going to cover is how we strengthened our competitive position in China, how we reinforced our lead in emerging markets and how the execution of our refranchising strategy has changed our financial model. Taken together, you’ll see that we made progress during the year in revolving Yum’s position as a high growth, high return company.
In the earnings release in David’s speech, you’ve already read and heard about the pioneer we had in China in 2010. But beyond the numbers, the China team also strengthened our competitive advantage especially by furthering our presence throughout that country. At KFC, we opened 414 new restaurants in China including 203 in the fourth quarter. This compares to a 166 units opened during the year by McDonalds. Therefore KFC opened about 250 more units. Just as important from the competitor’s standpoint is where we had these units. We entered 57 new cities, we are now in 713 different cities around China. In fact about half of the new units in 2010, we’ve in Tier 3 through Tier 6 cities.
KFC now more units in Tier 3 cities in smaller, that more the McDonald had in the whole county. As we pioneer in to new KFC cities and continue to develop existing Tier 3 to Tier 6 cities, we have been able to secure the best locations and hire great talents. This expansion also continues to be profitable. Please keep in mind that our combined margins in Tier 3 to Tier 6 cities are couple of percentage point higher than our national average.
We’re also starting to make meaningful progress in developing Pizza Hut Casual Dining in some lower tier cities. We headed 22 units in restaurants in Tier 3 and Tier 4 cities, finishing the year with a 137 restaurants in those cities. This is significant, because traditionally Casual Dining has been reserved only for Tier 1 and Tier 2 cities where incomes were higher. Based on the progress to Pizza, Pizza Hut made in 2010, we’re hopeful that Tier 3 and Tier 4 cities can provide strong ongoing growth opportunities in the years ahead.
As David mentioned, Pizza Hut Casual Dining has brought itself way beyond Pizza including Beef, Pasta and Rice dishes along with appetizers, beverages and deserts. This broad appeal further insulates us from Casual Dining competition. Pizza casual dining is light years ahead of other Western casual dining concepts, in terms of units, people capability and the ability to grow nationally.
Moving behind China, let’s look at other emerging countries. Through 2010, we highlighted our unique strength and growing presence in emerging markets. Places like Indonesia, Vietnam and Nigeria would open up our first KFC restaurant in 2010. We are so excited about our emerging markets because we have the largest presence and we are growing so rapidly, it is simply a huge opportunity.
I’m not going rehash the information we covered in our emerging markets trend in the New York meeting. However, I will say that while each market is different, as a whole we believe we improved our position in 2010. We also reached a few key milestones. When we take the 507 units we added in China, combined with the 548 million, it’s an emerging market at Yum Restaurants International. We both saw over 1000 new emerging market restaurants during 2010.
In addition, during the fourth quarter of the year, Yum surpassed a 10,000 unit mark for emerging markets. While we have been aggressively pursuing growth in China and other emerging markets, we also believe it is important to be disciplined in determining where the own company restaurants.
While we don’t see the potential for high-growth or high returns, we often refranchise the units and hand them over to strong local operators. Refranchise being great stability to earnings, reduce capital investments and improves returns.
During 2010, we substantially completed the ongoing refranchising of Pizza in the United States. Since we announced our US franchising initiative at the end of 2007, we sold over 1,600 units of franchisees. This refranchising has been a leading contributor to the one point increase in margins that have occurred in the US over the past three years.
During 2010 YRI margins improved about 0.5% from the refranchising of the Taiwan business. We expect further improvements in 2011 to the refranchising of Mexico that was completed in the fourth quarter. When you combine this refranchising with the growth in India and other emerging markets, we believe that the YRI portfolio improved significantly during 2010.
When you couple this significant refranchising with our heavy equity investment in China, our company owned portfolio has shifted dramatically in the last ten years. In 2000, 70% of our company owned units were in the US, while only 4% were in China. By the end of 2010 only 34% of our company owned units were in the US and 44% went China. This is a trade-off that we’re happy to make as we continue to benefit from the high-growth and high return China business.
This change has also increased our dependence on China. China is now the largest contributor of profits and has the most impact to Yum’s overall growth. However, we are working hard to grow in other emerging and strategic markets. Our plans for businesses in India, Russia, France and Germany, we are also investing company capital to grow at a high rate.
We believe that these markets combined with growth and other emerging markets and Taco Bell International, will eventually reduce our dependence on China. However, as you look at our portfolio shipped overtime and look into the future, we are very pleased with how our business model has evolved.
As we continue strengthening our position in China, we are enforcing our lead in emerging markets and refranchising when appropriate. We continue to enhance future growth, provide strong returns and increase shareholder value. In order to sharpen our focus even further, we recently announced our intention to sell our entire Long John Silver and A&W Restaurant businesses.
Let’s now look ahead to 2011. As a reminder in our ongoing battle, China, YRI and Taco Bell in the US account for about 85% of profits. In that model they are expected to generate operating profit growth rates of 15%, 10% and 6% respectively. This results in approximately 13% EPS growth.
As we look into 2011, we see some headwinds and some tailwinds that could impact division in overall Yum performance. In terms of headwinds, commodity inflation will be a challenge across all divisions. We planned for 5% food and paper inflation in China, along with 4% in the US and 3% in YRI. Currently, many commodity costs remain at high levels and if there is non-improvement in the coming months, there could be cost pressures above these levels.
In China we also expect high wage inflation with increases now expected to be in the mid-teens. There are also one-time items working against 2011 and 2012. A new business tax will have a negative impact of around $25 million. We’ll also overlap the benefit we received in 2010 of our brand’s participation in world expo which resulted in [$60] million of profit. These two onetime items have about 5% negative impact on China’s 2011 profits.
On the other side of the coin there’ll be some beneficial tailwinds. International’s new unit development remains a key driver of our growth. We expect to once again add 14,000 new units outside the US in 2011. The new units built in 2010 and 2011 just deliver about half of our EPS growth. Since the 2010 development was backend loaded, these units will have a larger impact than usual in 2011.
We are forecasting a foreign exchange benefit including at least $20 million upside from the launch. We’ll also see lower interest expense due to favorable data issuances over the past couple of years and as we retire the April 2011 bonds.
Finally, the Mexico refranchising should have a positive impact operating profit of about $10 million. Our teams around the world will work hard at managing inflation combined with a recovering global economy. We’ll need to be especially smart about how to provide great value to our consumers while also covering higher costs. Two examples of our approach have already taken place in 2011. At the start of the year at Taco Bell, we’ve prominently featured a $0.99 why pay more item. Last year, we were featuring a $0.89 item. Second, we took a modest price increase in China just before the Chinese New Year. This increase will cover the majority but not all of our inflation expectations for the year. At the same time in China, we continued to provide value offerings.
When you look at the whole picture and evaluate our headwinds and tailwinds, I am very confident that 2011 will be our 10th straight year of delivering at least 10% earnings per share growth. In addition, our strong balance sheet and powerful cash generation allows to return more than $1 billion shareholders in 2011 between our recently increased dividend and the $750 million of additional authorized share repurchases, we planned to put more cash in the hands of its rightful owner.
In summary, I am proud of this year’s financial results and all that we have accomplished in 2010. We have record EPS growth, added shareholder value and continue to evolve our business model. I am equally excited about our future as we are well positioned to deliver result in 2011 and beyond. Back to you David.
Okay Rick. Thank you very much and it’s time for us to take any questions that you have.
(Operator Instructions). Your first question comes from the line of David Tarantino with Robert Baird.
David Tarantino – Robert W. Baird
Question on the China margin outlook, you’ve mentioned that you took a price increase recently. Could you quantify the level of that price increase and, then talk about the outlook you have for margins relative to the pricing and terrific growth that you might be expecting for the year?
Well, just to do dimensionalize the pricing, if we look at the expected inflation we talked about on cost-to-goods sold about 5% and look at mid-teen labor inflation, you need about 3.5 to 4% pricing to cover that inflation. In the round that we just, we covered about three quarters of that amount. In terms of margins for the quarter, just want to remind people versus last year, last year we had record margins of over 26% that were driven by commodity deflation, which we say, we are not sustainable. We only took the price increase in the middle of the quarter. As a reminder, Q1 in 2011 only includes two months, January and February, so we basically got only one month of that pricing benefits. So we expect margins to go down versus off at very high levels.
David Tarantino – Robert W. Baird
Next Rick, maybe just a quick follow-up, is that a statement on Q1 or is that your outlook for the year and maybe if you could talk about for the year, what’s needed in terms of traffic growth to hold on to margins given some of the unusual comparisons you have?
Yes obviously, we know we are lapping very high margins in 2011. So I’m not sure, we are not necessary expecting margins to go up in 2011, I think they could go down a little up as high 2010 level, so though we expect them to stay, about 20%. With the inflation piece, we typically say that we need about at least 4% same store sales growth to hit our profits targets. This year probably more than the inflation David, we’re also lapping those onetime items, so that adds probably a couple of points, at least a couple of points, what we need to do to deliver our normal numbers.
Your next question comes from the line Jeff Omohundro with Wells Fargo.
Jeff Omohundro – Wells Fargo
Thanks. Another question on the China, you mentioned pricing as a mechanism to manage inflation. I wonder if you could talk about other initiatives to improve the efficiencies in the operating structure in that the market that might help you further offset inflation and then as a follow-up secondarily to that, how’s your inflation environment impacting returns on new units? Thanks.
Yes, in terms of we are always in China working of productivity initiatives, especially since we are on distribution system, so we always have a full cord press on that. I don’t think there’s any one item that I could point to that’s special, that we are doing anything special this year. That’s something we just always have a huge amount of emphasis on given the size of our business there and like I said because we run the system.
In terms of new units, we are still extremely pleased with new unit turns; we don’t see building any impact there. I think, I have to look at long term is, as I have said at the December meeting. I’m still personally bullish on long-term margins in China and we already have less than three year paybacks, so I don’t really see that change in them. One of the things was we talked about in this speech, is that we are doing very well, really throughout the country and our returns through all tier cities and we are also always put a lot of pressure on ourselves to build new sales layers on the KFC side. We were very pleased with the progress we made on things like 24 hour delivery, practice, 24 service delivery in breakfast. So we were very pleased with how those are developing.
Your next question comes from the line of Michael Kelter with Goldman Sachs.
Michael Kelter – Goldman Sachs
Hi guys. I just wanted to follow-up on China, again just broadly when you think about, if we’re re-entering in an inflationary environment that could be, let’s call it semi-permanent, how do you think about consumers increase purchasing power versus labor and food inflation and whether you think you might be less beneficiary or this might hurt you over time. And then secondly, but related, can you talk a little about the labor inflation, please because you’re now compounding double-digit labor inflation year-over-year and it looks like structurally that seems to be a part of the China P&L but more and more challenge overtime in this quarter was the highest percentage of sales that we’ve seen in that line item. (Inaudible). So, if you could help on those parts it would be great.
Mike, let me start with the second part. Labor, we always have said that we expect labor to continue to go up in China. So, that’s part of the business now has been for years and I think will continue for the years ahead. Now the China policy, to the first part of your question is to, they want increased wages to the broad population in the years ahead. It was especially high in the second half, especially the fourth quarter of 2010 because we had two increases.
So we had labor increases twice during 2010, which is going drive up as we sort of said earlier, the second half of ‘10 and at least three quarters of ‘11. And in addition, there were no really wage increases in 2009. So they more than made up for that, it looks like in 2010 and they look to do the same in 2011. Also, in the fourth quarter, we opened up, you saw those units we opened. So we obviously had training to support those new unit openings, so that further made the fourth quarter labor higher than usual.
As you go forward to the first part of your question which is obviously an important question. As I suggested in New York look I actually don’t fear an ongoing inflation scenario. I think the strongest brands are always in the best position to manage that. You obviously have to work very smartly of how you manage value, pricing and menu mix management, but, to me, when you have strong brands and 24-hour platforms, you’re probably in a better place than most people to do that. So, I feel comfortable operating in that environment even though it’ll keep us on our toes.
The only thing I would add on that is, I remember going to China for the first time in 1997 standing, watching all the customers in there where you’d see the parent standing in line with their kids, and they buy the chicken for their kids, and the family couldn’t really eat. Now when I go to China you see the kids buying the food. And I think one of things that’s happening is as wages go up and the economy continues to grow; the consumer base is just growing exponentially and someone like told me we’d be in over 700 cities, Tier 4, Tier 5, Tier 6 cities 10 years ago. I am not sure I would have believed it, and the only reason is, is people have money there and they can spend it, and I don’t see that going down in the future. I think that’s going to go up and so, I think we’re very well-positioned to take advantage of the opportunity, the dynamic growth that is going on in China, and we’re going to have, just like we have had in the US and other parts of the world, we’re going to have the headwinds, tailwinds, all that. But we are like any other business; we have the same components that we can manage effectively to deal with it.
Your next question comes from the line of Jeffrey Bernstein with Barclays Capital.
Jeffrey Bernstein – Barclays Capital
Rick, just one clarification on your prepared remarks and then a question on the food cost sort of things, you gave good clarity in terms of the basket, I think you said a five, four, and three for the three markets, but then you kind of mentioned if things don’t ease in the near-term those could prove conservative, just wondering in terms of that basket like how much of that is actually secured and therefore not vulnerable I guess versus the floating where you’re vulnerable to that further inflation. I am just trying to get some clarity by region in terms of what kind of assumption you’re making for the rest of the year that perhaps is not locked.
Then secondly just on the YRI and I guess sales and margins. I know over the first half of the year you had talked about perhaps stronger sales and profit growth in the second half. Seems like you always had a I guess sluggish sales at YRI, but yet the margins were up significantly both operating and restaurant, I am just wondering, I know it’s tough to aggregate 100 plus countries, but is it possible to talk about where the comp fell short of expectation and on the flip side the drivers of the margin and the related sustainability despite the comp? Thank you.
Let me start with the food question then we’ll go to the YRI sales, then we’ll go to YRI margins. On the cost of sales, we’re basically pretty much hedged for about six to nine months depending on the market right now. So we’re fairly well locked in and if I had to dimensionalize, I’ll use our two biggest markets, China and the U.S. If food costs don’t come down, we figure we probably have about $40 million of further exposure, about $25 million of that in China and $15 million in the US. We’ll obviously give updates later in the year as those unfold, but that’s sort of the nature of the risk that’s out there. Regarding YRI, why don’t I let David talk a little bit about the sales piece of that and I’ll come back to the margin side of it.
Yes, I think that first of all, I think we have been operating in a tough macro environment. One of the things I’m really pleased with is that, we are making the investment and time and effort to really develop the future dayparts and more opportunities for our customers so that we can leverage the sales assets and I think these are going to take time for us to get that done. We step back and take a look at what we could have done better at YRI the last year. We think we should’ve done a better job just with innovating around our core base brands and having more effective beat year ago marketing and operating programs and I think as we pursued the long-term, we didn’t have the right balance and what I think we really have to do going forward in the team is addressing this is that we’ve got to have the magic event better beat year ago core brand innovation both Pizza Hut and in KFC and continue to make progress on the sales layers. I think we have that balance but I am really glad that we really jumped in big time on the dayparts, multiple proteins and things like non-fried options. So, I think that’s going to bode well for the future. But we need to more beat year ago core innovation. If you look at the sales, I think the developed economies really struggled the most Japan, Canada, Australia, that’s where we had the softer sales and we were hopeful that those markets will make progress in 2011.
On the margin question Jeff with your point is sort of hard to aggregate but the two main drivers that point to, one was the refranchising helps with the Taiwan refranchising probably got us a little more than half of the full year margin improvement and the second, Thailand, which is mostly company-owned market, performed extremely well during 2010 and that drove margins. The other countries we had some ups and some down that basically balanced themselves out during the course of the year.
Your next question comes from Andy Barish with Jefferies.
Andrew Barish – Jefferies
One quick just backward-looking explanation. The fourth quarter, you were looking for a China inflation on the food cost line. It wound up coming in deflationary and you leveraged food cost without the benefit of the price increase you just took. What switched up there over the course of the last few months?
There wasn’t one dominant item that improved the numbers. We did a little better than what we expected to do on the chicken line. We expected a little bit more chicken inflation than what we received but other than that it was a little bit everywhere as opposed to one item.
And Andy just in addition to that. You’re looking at the year-over-year change. We did get pretty close to the inflation we expected but we were also lapping higher food cost a year ago because we did have when you look at the year last year when we typically do in a quarter there was much more value orientation because if you remember, we were still really kind of in the slow economic times. So there was a big value focus in the China business in Q4 last year. We’re lapping that this year with much less value focus. That was a benefit to food cost.
Your next question comes from the line of Greg Badishkanian with Citigroup.
Gregory Badishkanian – Citigroup
Maybe just could you have your ears to the ground in China maybe just a little bit on the competitive landscape? Are your competitors also raising prices to offset the higher commodity costs such that the consumer is going to be you think will probably easily accept those types of price increases?
Yes, I think all competitors are going to have to do it. You heard the wage inflation. That wage inflation, not a huge part of your P&L but it’s so sizable and you have commodity inflation that’s there. So, we’ve seen increases in Chinese casual dining, McDonald’s different pricing late in 2010. So, I think everybody to your point is going to be having to do that, Greg.
Your next question comes from the line of Joe Buckley with Bank of America.
Joe Buckley – Bank of America
Rick, going back to the last time we had high food cost inflation back in ‘08, your approach was to take a series of relatively small but frequent price increases. Is that kind of the game plan going forward? You talked a lot about China; I think you made reference to Taco Bell having both the traffic and a check increase in the fourth quarter. So, if you would, maybe talk about pricing at Taco Bell specifically as well?
First of all, Joe to your point, I think our philosophy in general is, we like to go with smaller earlier price increases than waiting until you have to take it and then having a large increase. We think that generally the consumer handles that better. When things are tight, you obviously have to provide. The magic of it, you’ve been in the business a long time, Joe. As you know, you have to balance providing the value and taking the pricing and how do you get that right.
So, Taco Bell was more an example of what we’re doing with our innovation calendar than sizable price increase. We’ve taken very modest price increases at Taco Bell so that last year and first part of this year, but there what we also look at is what we are promoting and what those items are. What happened during the first part of 2010, we were promoting generally given the economy lower-priced items and in the back half of the year with the big box instead of the $5 box and other initiatives, we were promoting some higher-priced items getting the balance of little bit more normal. So we’ll continue to sort of do things like that as we get into 2011.
Joe Buckley – Bank of America
Then a question on refranchising. A lot of activity in the U.S. in the fourth quarter including about 52 KFCs. Is that the beginning of a stronger KFC push and then also are there other opportunities for refranchising of YRI in 2011?
In terms of YRI, we’re going to continue in terms of I’d say within market refranchising, the U.K. being the biggest part of that. You probably won’t see any huge markets being sold on a YRI basis. In the U.S., yes, we said, 2011 we’re going to put our focus against KFC. We had waited for a while for various reasons, started to push really in the second part of last year and so that’s going to be by far our biggest focus in 2011.
Your next question comes from Mitch Speiser with Buckingham Research Group.
Mitch Speiser – Buckingham Research Group
In the press release I guess backing into the numbers a little bit, it looks like emerging market comps may have been up about 3% or so in 2010 and in the fourth quarter can you comment on how the emerging markets did in summary, in total I guess. Separately, in the quarter the G&A line was up pretty significantly, I believe up 14% or so year-over-year. Can you comment if there were any one-timers in there and how you see the G&A line looking in 2011 on a global basis?
Mitch, I’ll give you the emerging markets, developed market breakdown first and then Rick will cover the G&A. For the fourth quarter emerging markets system sales growth for YRI was plus 9% and the developed markets was plus 4% on sales, so pretty consistent trends throughout the year.
Mitch Speiser – Buckingham Research Group
That’s the sales number. Are you willing to share, what the same store sales were in both those…?
We don’t actually calculate them, Mitch it’s not management reporting. So, you have to do it same way basically that you did it in emerging market unit growth is running at about 6% and developed is running about 1% to 2%.
Mitch Speiser – Buckingham Research Group
There was probably some foreign exchange in the developed number?
That’s not in terms of currency basis.
Just to help you with one thing in the table in our release, you just have India system sales in the fourth quarter growing 39% and we probably had unit growth little over 20%, so the balance in that would be same store sales growth. Regarding your question on G&A, we had a fairly sizable increase it was incorporate G&A which really isn’t allocated to the divisions that was primarily due to bonuses, which you saw the numbers we benefitted as employees but it cost us more money on the bonus front or other timing issues. One time for the quarter probably I’d say typically on an annual basis.
Your next question comes from Howard Penney with Hedgeye Risk Management.
Howard Penney – Hedgeye Risk Management
Your China operating margins are basically flat over 10 year period despite the growth coming from those cities that have margins I guess anywhere from 500 to 800 basis points higher. So the dynamics of the Tier 1 cities, can you sort of talk about the dynamics of margins there over that period of time? Then, I know you answered the question previously about pricing end margins in China inflation, I guess just generally thinking, are you using price or thinking about price as a way to protect margins or to limit the decline?
Let me the second question. First, Howard, I think it depends where you. I think in a one period of time we expect to be able to price with inflation. Again, we think we have a strong enough brand to be able to do that and I don’t call it price, I call menu mixed management and pricing somewhat what we talked about Taco Bell earlier so we use both of those tools over time. In terms of fourth quarter 2010 and first quarter 2011, we probably were overlapping very high margins for China as we didn’t necessarily think we’re sustainable. So we still like our ability to be 20% plus in margins but it is a challenge overlapping in the short-term some of those inflation numbers.
So we sort of said, in the first half of the year, the inflation’s probably going to be out ahead of the pricing we took although we did cover a decent chunk of that as I sort of said before probably back three quarter of that aspect. Regarding your first question, Howard on the Tiers is that you’re right. What basically is the difference in the margins, there is always some differences between the tiers, but it’s really the Tier 1 margins are lower than the margins for the country, and that’s primarily driven by real estate. There is other costs that are higher in the Tier 1 cities, but probably the thing that’s changed over that 10-year period is, there is leases are a lot more expensive today than they were 10-years ago. We still get very good returns there. We’re continuing to develop there. We’re doing less fill-in development, going more for new neighborhoods than we’re probably where we were a few years ago.
Howard Penney – Hedgeye Risk Management
I guess the question is, I was thinking about when you were selling off units in the (less than) selling off, you’re going through that portfolio, in fact there was a positive impact to margins from selling off your underperforming stores. I’m just curious as to why you don’t see that same portfolio impact if you will when most of bulk of your development is within stores and regions of the country where margins are significantly higher?
Well, they’re not significantly higher. It’s really just the Tier 1 not quite as high as they were before, they’re still quite strong. I think the number we gave in December meeting was about in the 19% range. So, that’s not too shabby. That’s not a huge difference versus the national average.
Your next question comes from Rachael Rothman with Susquehanna.
This is Jake (indiscernible) for Rachael. I had a question just on food cost and how it’s going to progress throughout the year. You mentioned in the fourth quarter you got some leverage there because you were lapping some discounting. I’m wondering how long you lapped that for. Are we going to see similar effect in the first and second quarter here?
Just the fourth quarter.
Also, if you can comment on new commentary by McDonald’s on the informal eating out market slowing in China, what’s your perspective on that, are you seeing the same thing as in overall market?
We really haven’t seen that.
Jake, we don’t have the history like we do on the U.S. but when we look at our business there’s definitely seasonality and that could be what some people might be seeing. Like November and April are the lowest points in the year from a seasonality perspective because you have things like Chinese New Year that drives up sales and volume in the first part of the year and then you have some other significant holidays in other parts of the year like August and October. So generally we’re not seeing a slowdown in the industry. The growth rate is a little bit slower, but it’s not like something perceptible. The overall markets, when we look at the numbers, the numbers are looking good, but there is some significant seasonality in China because of the holidays.
So you don’t see a slowing just maybe on the part of competitors and feeling like you’re gaining significant share or any sort of market commentary?
No. We’re very happy with our business as David and Rick both said earlier in their comments. We’ve got great results from our sales layers and Pizza Hut Casual Dining is doing incredibly well, which is a higher check average business. So we have businesses there across the board, higher end casual dining and KFC with QSR, both businesses are doing exceptionally well.
Your next question comes from Keith Siegner with Credit Suisse.
Keith Siegner – Credit Suisse
This is a question for Rick. The CapEx for the year came in fairly substantially below the original guidance of 900 coming in actually just under 800 and that’s despite hitting all of your unit growth goals for the year. So, what I was wondering is now that you’ve refranchised Mexico, now that you’ve refranchised some of these other markets and you’ve made even more progress on some of the Company-operated base in the U.S., the unit growth targets remain roughly the same, yet guidance for next year is still 900 for CapEx. Where would the increase in CapEx come from or why would you need that? Is there a refresh cycle anywhere that needs to pick up? In other words, like, you’ve been extremely efficient with that CapEx thus far, what would lead it to increase going forward?
Keith, let me answer the first question just on this year’s 2010 numbers. First of all, there was a fair amount of our development, especially on the Company side that occurred in the fourth quarter. So, there was actually about $50 million of accruals relative to the CapEx that didn’t show up in the cash flow statement. So, effectively the number was about 840 just in pure CapEx and then there was $15 million in key money and land use rights for China that shows up in other investments. So, it’s was a little bit closer that in terms of the dollars versus our estimate then it just appeared on the cash statement.
In terms of structural things in CapEx, there is probably a little bit more as we try to add the sales layers of trying to get a little bit more remodels done and then when you try to put in capital to support those layers. So, there is (quite some) structural spending there. As we try to build out France and Germany, you’ve seen some of that already in that the mix of those countries are higher costs than some of our other pieces. But I’d call both of those modest in general, those are probably the two structural things that are changing.
Your next question comes from John Ivankoe with JPMorgan.
John Ivankoe – JPMorgan
Just a quick housekeeping question on the G&A. I actually saw it higher for both U.S. and YRI despite the refranchising. So I was hoping that you could guide us to a dollar G&A number in 2011 for both of those divisions is the first point. Secondly, both for current refranchising that was done in 2010 and planned refranchising in 2011, how much would that refranchising help Company store margins in both of those divisions at current thoughts?
We’ll have to come back to you to the math on both of those, John. I would guess you’re going to see probably in the three to I was going to say about 3/10 of a point for Mexico. The impact on YRI for Mexico about 3/10 of a point. We’ll have to come back with better numbers. That would be our estimate at this point.
John Ivankoe – JPMorgan
But presumably things like refranchising of Pizza Hut, U.K would also help. So that would be an addition to that 30 basis points?
That would be gradual as we do those (and that too) because it occurred in the fourth quarter we’ll the bigger impact in the U.K.
John Ivankoe – JPMorgan
What about the U.S., do you know off the top of your head? I’m sorry to put you on the spot on these specific questions?
John Ivankoe – JPMorgan
We can follow that offline. If I may, just since I have the mike for a minute, thoughts of the Pizza Hut lap for example in 2011, it was a major driver of the 2010 results in the U.S. Is it something that you think you can successfully lap or is it by definition a negative comp year for the brand?
Well, I think we’re very well, I know we’re very confident in the Pizza Hut brand. I think the proof is in the pudding, but this is the first time we’ve really gone into the year with a value rating that is the highest in the category, and we think that gives us a base to build on. We continue to be the leader in innovations. So, we take the value plus the innovation plus the progress we’re making on improving operations, plus the fact that we’ve got our pasta established to Tuesday Night and our wings established for Wednesday Night. We’re leveraging the asset through the week. We think we can have a solid year.
Your next question comes from Jason West with Deutsche Bank.
Jason West – Deutsche Bank
Just following up on that a little bit. You guys announced some portfolio changes this year in the U.S., and you said for the rest of the year you’re going to focus on the three core profit drivers in your commentary. Just wanted to get your overall thoughts on the Pizza Hut, KFC, U.S. businesses, your thoughts around keeping those businesses long-term or are you just waiting to get the profits up a bit there before you start talking about them a little more readily on these type of calls?
First of all, we’re a global company with global brands, and we plan on having global brands for as long as I can even imagine our Company. In fact, our vision is to be the defining global company, in the pizza world, and you’re not going to do that with brands that are piecemealed out. So, we see our self as a global branded company. We’re making some choices here in terms of how we wanted to really focus on, what makes our company different. I think what makes our company different is, nobody has a business like we have in China, not only with Pizza Hut, not only with KFC, but now with Pizza Hut Casual Dining and we’ve got East Dawning and Pizza Hut Home Service coming along, so we got a unprecedented position in China that we want to keep talking about. The other thing that makes this difference is YRI and in particular the growth that we have that’s coming in the emerging markets.
Then the third thing that makes us different is we got Taco Bell, which is a second most profitable brand in the United States that we think we can take from 5,000 to 8,000 units, since already 60% of our profits in the United States and we think that’s going to grow proportionately. So everything counts in this Company, everybody is bonused on their piece at Yum!. I can assure you that the Pizza Hut U.S. guys and the KFC U.S. guys are focused on growing sales and profits the right way and we have lots of discipline around that. The thing that really makes our Company different, are China, emerging markets and Taco Bell, plus the enormous cash flow we generate. This year we’re looking at least $2 billion, you just saw that we had an authorization to buy $750 million worth of stock, we’ve steadily increased our dividend in the past, so we pay $1 dividend and that kind of free cash flow is pretty powerful. So those are the things we want to talk about and I think that’s what our shareholders are most interested in. What are the biggest parts of our business, what’s the growth part of our business is going to keep us on the trajectory that we’ve been on.
Nicole, before you go to the next question, just a follow-up to one of the prior questions on the impact of the benefit of refranchising on the U.S. margin, the current run rate is about a half a point, 50 basis points. So that’s probably the best estimate we can give you for the U.S. going into 2011 and then going beyond that it will depend on pace of KFC refranchising.
Your next question comes from John Glass with Morgan Stanley.
John Glass – Morgan Stanley
A clarification than a question. The clarification just on the YRI comps, I think you reported flat comps for the year kind of backing into the numbers you provided, you saw 9% growth in emerging markets, it was 6% unit growths so it maybe has embedded 3% comps there and in the developed markets you had 2% sales with 1% unit growths, so that’s also positive. So, what wasn’t positive in the world that dragged it to flat as there are one or two regions where comps were significantly negative or countries that did that?
First, John, you got to keep in mind that that’s we didn’t identify what portfolio impact might be in those numbers. So, just by doing a simple math you can’t necessarily get to what comps might be, but having said that there are several of our larger developed countries that had slightly negative comps like Japan for the full year was minus 1, Canada was minus 2, and Australia was minus 2.
John Glass – Morgan Stanley
Pizza Hut Causal Dinning in China, it wasn’t too longer maybe a year or so ago, we talked about slowing development in some of the major markets because the returns weren’t as strong. I think that’s if I remember that correctly, now you are comping up double digits. So what is happening is it the result of maybe slowing development of those markets where you’ve seen now a surge in comps or is there something happening in the Chinese consumer where our brand is doing a lot better than the mid tier consumer in China, what is driving those very, very strong results?
I think first of all, we have done a really good job with the brand. So, the brand not only has it increased its variety, it’s improved its value at the same time. So, we have more value price pieces on the menu which sort of expands its reach. The other is that the wealth continues to come in China. So, people in Tier 3, and Tier 4 cities, tier point, we were cautious, that’s why we were cautious, we were having trouble now with our first unit in Tier 3 cities, but with our second unit in Tier 3 cities. So when the market helped us because the people got wealthier. The second is, we are doing more development in newer cities, cities that are new to Pizza Hut in Tier 3 and Tier 4. So, that’s sort of the adjustment we made but the brand strength has helped us a lot and obviously the economy improving continued to grow is helping us along.
I’m really glad you asked that question, because I think it says a lot about how we managed capital and how we manage growth. In China, the direction that we’ve given to Sam Su and his team is that you’ve got two phenomenal brands in KFC and Pizza Hut, they are diamonds. You got to just keep polishing that diamond and make it greater. What we never want to do is get our growth out ahead of our capability and our ability to generate great returns for our shareholders. So a couple of years ago, we did see some issues that we needed to address. The team went to work and came up with a dramatic way to drive same-store sales, improve the unit economics and now we’re expanding more aggressively.
So, that’s how we’re going to run our business in China, when you got great brands that are emerging in a powerhouse country. The main thing you got to do is make sure they stay diamonds and keep polishing them and polish them and we watch our capital like you can’t believe. People always said are growing too fast? The answer is no. We’re all over the fact that we’re getting great returns. The minute we seem to look like we’re not, I’m sure we’ll come back and we’ll tell you what the issues are. But right now, it’s full speed ahead on both KFC and Pizza Hut.
Your next question comes from Sara Senatore with Sanford Bernstein.
Sara Senatore – Sanford Bernstein
I have two quick questions actually. One is obviously a lot of strength in emerging Asia and now Africa. Just wanted to ask about a continent that we don’t usually talk about which is Latin America. It looked like, so you refranchised Mexico, it looked like the system-wide sales were actually fairly good I thought in Latin America. But I am trying to think about, is it something about that part of the world that maybe is less attractive as a market for KFC or Pizza Hut for whatever reason. So, that’s a question one. Then follow-up question was, just when thinking about Taco Bell growth in the U.S., do you still need to add AUVs or have you gotten to a place where you feel like your volumes are sufficient and you have a model that sets you up to growth to add those 3,000 stores?
In terms of Latin America, I don’t think there is anything wrong with Latin America. Our history there has been always been the greatest, but Latin America as a whole is there. If you look at our system sales growth for the year was plus 8%. The issue there is we don’t have any really power countries outside of Mexico where we have a lot of units. Our history there has not been as strong in some of the bigger countries and I’ll talk about Brazil in a second. On Mexico, we have a good business in Mexico. We just didn’t see that first of all, the franchisee we sold it to is as we said before, is a (indiscernible) franchise. He will do a great job with the brands. We just weren’t seeing the returns and the dynamic growth that we were hoping to see there. So, I think part of that is just that Mexico has not quite grown to the level that we hoped it would.
The country that has grown at that level has been Brazil. Unfortunately for us, our history there was, KFC we had failed twice before we went in the third time. We actually feel good about how the brand is developing there. We have a new partner that we added a couple years ago, who we think is a strong partner, but we’re still building the brand there and are ready to expand the brand there aggressively. Having said that, in some of the other smaller countries in Latin America we have some great brands. We have very strong brands in Central America; we have good brands in the Caribbean and obviously, we look at the rest of South America as opportunities for us and I’d say we have some good countries there, like Columbia et cetera is growing at a pretty rapid rate, but we don’t have power in some other countries that other people have.
I want to use this opportunity to reinforce again our use of capital. When we put the capital into the country we’re looking for great returns from the existing assets that we have and also we want to have a significant development opportunity. So we felt we had opportunities on both upfront in Mexico and I know we now have one of our best franchisees in the world who is excited about Mexico and thinks he can take it to the next level and I am confident that he will. We want to talk about Latin America more. We just got bigger things right now that highlight the difference in our Company. Taco Bell, we believe that we already are getting net new unit growth at Taco Bell with high margins in the relatively high average unit volumes in our U.S. system. What we really need at Taco Bell is incremental sales layer. That’s why we are working hard to develop breakfast. We are working hard to develop our beverage line with a real skew towards appealing to our target audience and that’s why we are working on ways that we can get into higher ticket dinner, home meal replacement items. So he gave us another $100,000 or $200,000 worth of sales I think our ability to grow Taco Bell will be demonstrated and that’s what we are focused on. So very excited about Taco Bell in the future and we think we will ultimately have a lot more units.
Your next question comes from Larry Miller with RBC Capital Markets.
Larry Miller – RBC Capital Markets
I was wondering if you can go back to the comment about pricing in China, can you talk about the competitors and how their pricing the branded QSR and local QSR and how that might compare with what you’re doing and then, I was trying to run some match Rick, and I don’t know if I got this right, but is 1% comp in China worth about two to three points of EPS to you, is that correct and then I have one question to follow-up on?
There’s so much that goes into whole China piece. I think that would be on the high side actually, but we’ll come back to that. We don’t have great data on what other people are doing, obviously we keep an eye on them. So we know, we think the price increase that we took is very similar in scope to what McDonald’s took, so we have that. In terms of great data on the other folks, I don’t have anything that I could really to point my finger to Larry. Again, we’re very confident that other people are going to have to do what we’ve done, if they haven’t done it already, and we were actually probably because we were going opposite strong numbers last year, we probably were not early. So we think we’re sort of in the middle of the pack and maybe even on late end of this price increase.
Larry Miller – RBC Capital Markets
Just on the share count, this is the first time I think as far as I can go back in the model that we have, it actually rose? Can you remind me why you weren’t more aggressive in share buybacks, you clearly had the cash flow to do it, and then as you think about the use of cash flow, could you talk about $1 billion that you are going to return to shareholders. Where does share buybacks versus the other potential uses of cash flows returning to shareholders stack up?
Yeah, at the hindsight I wish you weren’t more aggressive in, 2005, the short answer to your question. At the same time we were reducing our debt and so we think that was important in this environment, but to your point I went out ready to roll going forward. So, way we always look at the share repurchases. Is it the balancing item. We generate a lot of cash, we have the dividend. Clearly obviously the first thing on our list is putting the capital in where we think is appropriate, and then what’s left over is available for share repurchases. So, we think we’d be aggressive there, about the $800 million level or so for 2011.
Your next question comes from Mitchell Speiser with Buckingham Research.
Mitch Speiser – Buckingham Research Group
When we think about the emerging markets which is becoming a bigger part of your story even excluding China, and I know most of your emerging market exposure is franchise. You mentioned overall food cost inflation in YRI at up 3%. If we were to Isolate emerging markets can you tell us what the franchisees may be collectively are thinking in terms of what the food inflation is in these key emerging markets which is probably I’d say generally Asia, Eastern Europe and their ability to take pricing and just a general sense of the food cost inflation outlook in emerging markets given a lot of the headlines that we’re hearing are showing hyper inflation. Thanks.
Yes, I think that we’re probably just at a very different stage of developing in most of our emerging markets. So I think it depends on which one you’re talking. A lot of places that we talked about that as the December meeting is we’re really just establishing the brands. So it’s more a factor that your business model work and we think we have quite a bit of room in our business model in most of these places. So, it’s a matter of your economic strategy, your brand well positioned, how is the brand being accepted. So, for example if we talk about Africa, those are much more factors than a year-to-year inflation number.
Now obviously the economy has to absorb that inflation. So in long-term and their place is more a function of is inflation a commodity is going to get out of luck with economic growth. I don’t see any reason why that would happen in the long-term in those markets. And some of our more developed emerging marketplace like Indonesia, Philippines, the places where we have a lot of units, clearly those places people have the same equation that we talked about, China and the US had a managed inflation in that environment and usually what happens is there is a bit of a lag, if inflation goes, we’re already high in a particular country, you can’t price at all for tomorrow and you usually have to get a chunk of it first but that’s on a country-by-country basis. So, we think our franchises are pretty smart. They are obviously pretty good at protecting their bottom-line and growing the brand at the same time.
Okay, so let me wrap things up. Thanks again for being on the call. As we continue to execute against our global growth opportunities, I think you can tell that our business model is increasingly involving into higher growth, high return businesses. For 2011 we believe that all of our businesses are better prepared to drive sales. Importantly, keep in mind that about half of our EPS growth will be driven by the new units that we built last year and units to be built this year. We continue to expect EPS growth of at least 10% for 2011 which will mark the 10th consecutive year we meet our annual target of at least 10% growth and we’re confident we will continue to build the value of our company in 2011 and beyond.
From a personal standpoint I’ve never been excited about leading this company in the coming years, we are on the ground floor growth and we got the people and all the resources takes to make it a reality. So, thank you very much for participating on the call.
Thank you for participating in today’s conference call. You may now disconnect.
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