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Executives

Tim Jerzyk - Senior Vice President of Investor Relations and Treasurer

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

Richard T. Carucci - Chief Financial Officer

Analysts

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

David Palmer - UBS Investment Bank, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

John S. Glass - Morgan Stanley, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jason West - Deutsche Bank AG, Research Division

Mitchell J. Speiser - Buckingham Research Group, Inc.

Yang Huang

Andrew M. Barish - Jefferies & Company, Inc., Research Division

Larry Miller - RBC Capital Markets, LLC, Research Division

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

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

Yum! Brands (YUM) Q4 2011 Earnings Call February 7, 2012 9:15 AM ET

Operator

Good morning, and welcome to Yum! Brands Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to introduce Tim Jerzyk, Senior Vice President of Investor Relations.

Tim Jerzyk

Thank you, Rachel, and good morning, everyone, and thanks for joining us on the call today. The call is being recorded and will be available for playback. We are broadcasting the conference call via our website at 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 earning release from last night and the risk factors included in our filings with the SEC.

In addition, please refer to the Yum! Investor section at our website to find disclosures and reconciliations of non-GAAP financial measures that will be used on today's call.

Finally, we would like you to please be aware of a few 2012 Yum! IR events. These are save-the-date mentions for you. Wednesday, April 18, our first quarter earnings release will be after the market close. On September 12 and 13, hold the date, we will host an investor conference in China. As we get more details, we will definitely be communicating to you via our blast e-mail. And then finally, our Annual Investor Update meeting will take place on December 6 in New York City, on Thursday, December 6.

On 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.

David C. Novak

Okay, great, Tim, and thank you very much, and good morning, everyone. I'm pleased to announce we delivered 14% earnings per share growth in 2011, marking the 10th consecutive year we exceeded our annual target of at least 10%. Before I talk about our results, I'd like to start by thanking all of you who attended our Investor and Analyst Day this past December in New York. This meeting gives us the opportunity to go public with our goals and commitments, as well as showcase our management talent from around the world. The theme of our meeting, if you recall, was on the ground floor of global growth, China and a whole lot more. We highlighted our 10-year track record, but even more importantly, the future growth prospects of our company. The facts are we have a portfolio of brands with leadership positions in China and other emerging markets with a long, long runway for growth.

We have an asset base of over 37,000 restaurants, and we continue to make progress leveraging these assets further by building sales layers and expanding day parts. Additionally, our strong cash flow generation and disciplined approach to deploying capital allows us to invest in the future growth of our business, as well as return cash to shareholders through a meaningful and growing dividend and make significant share buybacks.

We have tremendous confidence in our business model, and we're confident the best is yet to come. Today, I'm going to highlight how some of Yum!'s unique strengths position our company for even more growth ahead.

First, our leadership position in China and in other emerging markets. Over half of our operating profit is now generated in China and the 72 other emerging countries in which we operate throughout the world. Yum!'s strongest businesses are located where the highest growth is expected to occur in the years ahead. This is a very powerful combination. We view China as the best restaurant growth opportunity of the 21st century. Our brands further strengthened their category-leading positions with a record 656 new restaurants and extraordinary same-store sales growth of 19% this past year.

KFC now has 3,701 restaurants in over 700 cities throughout the country, and continues to expand into new cities, as well as increase its penetration levels in existing markets.

Pizza Hut Casual Dining now has 626 units and is successfully opening in lower-tier cities. Its strategy to offer tremendous variety, everyday value and refresh 25% of its menu twice per year has consistently driven sales and profit growth. It's important to note that China new unit returns are the best in our business with cash paybacks within 3 years.

The macro environment continues to work in our favor in China. Rising incomes are making our brands even more affordable for an increasing number of people. In fact, the consuming class is expected to double over the next 10 years, going from 300 million to at least 600 million people, as significant urbanization continues. With this as our tailwind, our new unit development pace will continue at a high rate and we will continue to grow same-store sales.

Our strategy in China is to have leading brands in every significant category. KFC is the clear leader in Western QSR, Pizza Hut is far and away the Western casual dining leader and we're developing Pizza Hut Home Service to capture the growing off-premise market and now have 135 home service Pizza Huts.

We're also building East Dawning to be the premier mainstream Chinese food QSR concept. And I'm pleased to say on February 1, we acquired Little Sheep, the leading hot-pot brand in Chinese casual dining with approximately 450 system restaurants. This acquisition advances our strategy to have leading brands in every significant category.

We are looking forward to strengthening Little Sheep's operational model and increasing its market leadership position. We're very excited about the long-term potential of this brand, and we'll make the necessary investments required to ensure its success.

As I mentioned earlier, we have China and a whole lot more. We made incredible progress in India, opening 101 new restaurants in 2011. 10 years ago, we were essentially just beginning with KFC in India. And now it's our second-leading country for new unit development. In fact, we're so excited about our prospects in India and its impact on the future growth of Yum!, that we're going to break it out as a separate division for 2012 reporting.

Those of you who made it to our New York meeting got to hear from Niren Chaudhary, President of Yum! Restaurants India. Niren spoke about how encouraging it is to see that our new unit progress with KFC in India is very similar to what we saw in China during its first 10 years. Niren and his team identified key elements driving success in China and are adapting these strategies in India to leverage our iconic brands and build concepts with broad appeal. While we don't expect meaningful profit contributions from India this year, we are laying the foundation for this business to have a significant impact on Yum!'s profit growth in the future.

We also made stellar progress in Russia, where we're rebranding KFC Rostik's restaurants to stand-alone KFCs. And same-store sales growth in Russia is the best in our business. We know our primary competitor makes over $300 million in Russia. We're just getting started and we have plans to build a strong business in Russia as well, as we build off of our base of nearly 150 restaurants.

We are also driving major growth in the continent of Africa, building off our 656 stores in South Africa. We entered Zambia, Ghana and Kenya in 2011, and plan to enter 7 new countries in 2012, in addition to expanding our business in South Africa. In all, we plan to have restaurants in about 20 countries by the end of this year. With over $1 billion people throughout the continent of Africa, we know we're just getting started.

As a point of reference, we have about 60 restaurants per 1 million people in the United States. We have fewer than 2 restaurants per 1 million people in the top 10 emerging markets. Clearly, Yum! Brands has a long runway for growth in emerging markets.

Now one not so well-known aspect about Yum! is the solid progress we're making in both France and Germany. Our restaurants in France have the highest average unit volumes in the world for Yum! and KFC. We continue to build our scale and increase television advertising. France is also the first market where we experimented with the business rental market to drive new unit development and returns. And we've taken this approach to Germany where we're expecting to have the necessary scale to utilize television advertising in 2013.

We have 133 KFCs in France and 76 in Germany today. Our challenge going forward is to secure great sites as fast as our people capability allows. So while France and Germany are certainly developed countries, they are clearly emerging businesses for Yum! Brand.

Today, we make less than $50 million in France and Germany, while our primary competitor makes well over $1 billion in these 2 countries alone. Clearly, we are on the ground floor in continental Europe.

With our leadership position in emerging markets and new unit opportunities around the world, the Yum! growth story is about China and unquestionably, a whole lot more. In addition to our vast new unit development opportunities in emerging markets, we have tremendous potential with the 37,000 restaurants we currently have in our portfolio. We've been very successful in China, leveraging our assets throughout the day with breakfast, 24-hour service, delivery and innovative beverages.

We're making progress in several other countries as well. In Yum! Restaurants International, we have nearly 4,000 restaurants with grilled ovens, which enable innovative non-fried products, and 3,700 restaurants serving our Krushers line of frozen beverages. These numbers will continue to expand further in 2012.

We understand it takes time to build these incremental sales layers and day parts, and we are committed to their success.

We're also reinvigorating our U.S. business. We had positive net unit growth at Taco Bell and Pizza Hut in 2011, and we expect this trend to continue. As I mentioned earlier, Taco Bell just launched breakfast in 800 restaurants in the West Coast with its First Meal strategy. Taco Bell built an incredible late-night business by gradually staying open longer and longer. We're taking that same strategy and applying it to breakfast. We'll be opening for breakfast about 8:00 a.m. and gradually moving that earlier as we gain traction.

We're also reinventing the taco by launching the Doritos Locos Taco in March, which is a taco made from the nacho cheese Doritos. These are just a couple of examples of the exciting things you'll be seeing at Taco Bell this year.

Given the importance of Taco Bell to our U.S. profitability, I'm pleased to say Taco Bell has reversed its negative sales in the fourth quarter, and Taco Bell's positive same-store sales trends continue as we speak.

We are confident Taco Bell is on its way to strong performance this year, as we ready for the launch of Doritos Locos Tacos. So once again, we're pleased the brand has regained momentum. We will comment no further on recent sales trends.

Pizza Hut delivered a solid year in 2011 on the heels of a great 2010. The combination of value, innovative new products and unique bundling has performed well. We will continue to leverage these strategies going forward. Our U.S. business is clearly in a position to improve results. We expect profit growth from our U.S. businesses this year and more consistent performance going forward.

Our success in executing these strategies has driven our return on invested capital to over 22%, which is among industry leaders, and we continue to be disciplined with our capital allocation. We generated over $2 billion of cash from operations in 2011. We're fortunate to have many high-return, global opportunities to invest in for future growth.

We will also continue to return cash to shareholders. 2011 marked the seventh consecutive year we raised our dividend at a double-digit rate. Our dividend now has an annual rate of $1.14 per share. We also repurchased $733 million of our stock in 2011, and expect to repurchase about $800 million in 2012.

In conclusion, we're very proud of our track record of success. We will continue leveraging our strength in China and other emerging markets. We are challenging all our businesses to look for ways to further utilize our 37,000 existing assets. We expect better performance in the United States. And we continue to generate significant cash and will remain disciplined in our approach to deploying capital.

I'm encouraged by the positive momentum we have in our business. We are well positioned to meet or exceed our annual target of at least 10% earnings per share growth in 2012 and beyond.

So now let me turn it over to Rick Carucci, our Chief Financial Officer.

Richard T. Carucci

Thank you, David, and good morning, everyone. Today, I'm going to cover 3 topics. First, I will discuss our fourth quarter and 2011 full year results. Then I'll provide a brief update of our outlook for 2012. Finally, I will talk about the actions we took in 2011 and plan to take in 2012 to reinforce our high-growth, high-return business model.

First, let's talk about the fourth quarter. Let me remind you that our U.S. business and a portion of Yum! Restaurants International benefited from an extra week in the fourth quarter of 2011. This had a material positive impact on our fourth quarter results. We also incurred higher spending throughout the year in franchise development incentives and higher-than-normal restaurant closures. Therefore, the combined impact of the 53rd week offset by this higher spending only had a modest positive impact for the full year of 2011.

During the fourth quarter, operating profit grew 14% prior to the foreign exchange benefit. In the U.S., the 53rd week had an $18 million benefit to operating profit. Without the benefit of the 53rd week, U.S. operating profit would've been flat versus prior year. For Yum! Restaurants International, the 53rd week had an $8 million benefit to operating profit.

For Yum! overall in the fourth quarter, operating profit grew 8%, excluding the benefits of both the 53rd week and foreign currency exchange.

Sales improved in the fourth quarter through much of Yum!. China same-store sales growth increased by over 20% in the quarter, when we added 327 restaurants. At YRI, after seeing same-store sales growth of 2% in the first and second quarters, we had 3% sales growth in the third and fourth quarters.

The fourth quarter also represented the highest quarter of same-store sales results for our U.S. business. All 3 U.S. brands had higher same-store sales in the fourth quarter than they did in the third quarter. We are glad to end the year with a sales uptick and with some momentum to carry us into 2012.

Now let me provide a brief overview of our full year results in 2011. Our China business simply had an exceptional year. Record development of 656 new units, combined with 19% same-store sales growth on a business of our scale is quite an accomplishment. While our China business has produced some stellar years, I personally believe 2011 was our finest sales year ever. With that said, we simply cannot expect 19% same-store sales growth going forward. And fortunately, our business model does not rely on this heroic performance, as new unit development, combined with more moderate same-store sales growth, can still drive strong system sales growth and strong profit growth.

We ended 2011 with full year restaurant margins of 19.7%. This was in line with our recent expectations. During our third quarter earnings call, we stated that we expected restaurant margins to decline in the fourth quarter due to high inflation, but for full year margins to be about 20%. We expect to make progress closing the gap between inflation and our menu pricing, and to see positive year-over-year restaurant margins in the second half of 2012.

I have one final comment to put our China results in perspective. As we look back to our 2011 year, please note that these results were on top of a very strong performance in 2010. In fact, in U.S. dollar terms, China earned about $600 million in 2009. By 2011, China operating profit exceeded $900 million. This represents a 50% increase in profit over just a 2-year period.

Yum! Restaurants International had a solid year, opening 905 new units including 101 units in India. As David mentioned, our international team did a great job of making progress in our high-growth countries. To help reinforce this point, please note that 622 of our new units were in emerging markets and over 90% were opened by our franchisees.

In the U.S., results were disappointing in 2011 with full year profits down 12%. We had a solid year at Pizza Hut, but weak sales and profit results at Taco Bell and KFC. As we said in New York, given our product news and cost management, we believe we are well positioned to have sales and profit growth in the U.S. in 2012.

Before I end my comments on 2011, let me provide some context for Yum!'s results. In his remarks, David mentioned that our decade-long track record of EPS growth has been strong. We're proud to be a very select group of companies that have produced such consistent growth over this time frame. Yum! posted 2011 earnings per share of $2.87 before special items. On a similar basis, our EPS is over 3.5x what it was 10 years ago.

During the same decade, our ROIC has increased 4 percentage points to over 22% in 2011. We look forward to building upon this track record as a high-growth and high-return business for many years to come.

Now let's look ahead to 2012. At our Annual Investor and Analyst Conference in New York in December, we laid out detailed plans for our growth expectations in 2012. So I won't repeat what we stated there. If you did miss our investor conference, the presentations are still available on our website.

However, there are 2 significant areas that I do want to address today as it relates to 2012. First, international new unit development remains a key driver of our growth. We expect to again add 1,500 new units outside the U.S. in 2012, at least 600 new units in China, about 800 new units in Yum! Restaurants International and 100 new units in Yum! Restaurants India. The 2011 and 2012 new units are key drivers of our EPS growth.

Second, I want to comment on China sales. For the first quarter of 2012, given the strong sales over the Chinese New Year, and keeping in mind that our first quarter consists of only January and February, we expect solid double-digit same-store sales growth. As the year progresses and the overlaps become more challenging, we do expect same-store sales to moderate. Of course, it is difficult for us to predict in what quarter this will happen. We do expect the combination of strong same-store sales and new unit development to produce healthy operating profit growth in 2012 in China.

Our overall outlook for Yum! has not changed significantly from the December meeting. We are confident that 2012 will be another year of double-digit EPS growth for Yum! Brands.

Finally, I want to spend a minute talking about our evolving and enduring business model. As I have said before, our philosophy is really pretty simple. We reduce company ownership in highly penetrated or underperforming markets and we increase exposure in emerging and under-penetrated markets. By following this philosophy, and due to strong execution by our division teams, our business model has evolved over the years. Today, over 70% of our operating profit is generated by our international businesses. We ended 2011 with over $1.5 billion in operating profit in China and YRI. 10 years ago, we made only about $350 million in these businesses combined, which represented 30% of our profits at that time. The vast majority of this growth has been in emerging markets. We took actions in 2011 and plan to take more actions in 2012 that are consistent with our principles and that will prove our ability to further grow emerging markets.

We continue to reduce our footprint in highly penetrated markets. In December of 2011, we completed the sale of Long John Silver's and A&W All-American Restaurants. The larger of these concepts, Long John Silver's, has about 97% of their restaurants in the U.S. Second, we continue our U.S. refranchising program. Our plan is to retain about 5% ownership in KFC and Pizza Hut. We are currently at 8% ownership with Pizza Hut and plan to be at 5% ownership for KFC by the end of 2012. We announced at our investor conference our plan to reduce Taco Bell U.S. ownership from 23% to about 16% over the next 2 years.

Finally, we announced our decision in the third quarter of 2011 to refranchise our entire Pizza Hut U.K. business. We have started the sales process, and our intention is to sell this business this year.

At the same time, we are aggressively growing our presence in emerging and underpenetrated markets. While our franchise partners fuel the majority of our new unit growth, we will also build company units in international markets where we can achieve scale, realize high growth and yield high returns. We've made 3 acquisitions in recent times that meet this criteria. First, in 2010, we exercised our option to take full management control of Rostik's KFC in Russia. As David mentioned, during 2011, our first full year of operations, results have been impressive as Russia had one of the highest same-store sales growth rates in all of YRI. We've made significant progress at rebranding this business as a KFC brand. This has increased our confidence that Russia will become a big business for Yum!.

Secondly, we bought out our largest KFC franchisee in South Africa in the fourth quarter of 2011. This acquisition allows us to establish an equity base in South Africa and to fuel the high-growth potential for the rest of Africa.

And finally, just last week we completed the acquisition of Little Sheep in China. We're very excited to bring our operating and development expertise to this business. Our China team is executing the transition of Yum!'s ownership of this brand as we speak.

The Little Sheep business will add about 5% to our revenue base in China for 2012. With the timing of the acquisition, there will be no public filings for full year 2011 results. The last public filing was for the first 6 months of 2011.

We are reviewing the full year financial information now. But we can tell you for the year 2011, revenues grew by about 10% as a result of new unit expansion. Net income was down for the year, continuing the trend in the first 6 months. Same-store sales were negative in the back half of 2011. Besides sales deleveraging, margins were also negatively impacted by significant commodity and labor inflation. We will share more information with you regarding the expected profit impact of this acquisition for Yum! in 2012 at a later date. However, when you take into account transaction and transition costs, we expect only a modest profit impact in 2012.

In conclusion, I am very confident in the strength of our business model. We believe that the investment decisions we are making today will set us up for success now and for the long term. We will continue to invest in underpenetrated markets with a long run rate for growth, deploy capital in our existing asset base that generates high returns and leverage these assets with additional sales layers and day parts to generate same-store sales growth.

In our New York meeting, I pointed out that our business is evolving and enduring. In fact, I showed that we expect a robust EPS model in the year 2020. We intend to do the things we need to do to grow the business each year and to continue to lay the groundwork for our growth in the future. I am confident that we have a strong business in 2012, 2020 and beyond.

Back to you, David.

David C. Novak

Thank very much, Rick. What we'd like to do now is open it up for any questions that you have about the business.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from David Tarantino with Robert W. Baird.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

My question is really about the pace of unit openings in China. That business is showing a lot of top line momentum and great returns on capital. And you exceeded at least the low end of your guidance fairly significantly in terms of unit openings for 2011. So the question is what are your thoughts on being able to sustain that higher level of openings and potentially even move it higher as you look into 2012 and beyond?

Richard T. Carucci

As you mentioned, the Chinese team has just had an amazing track record for getting unit growth and also getting this growth through all tier cities. We continue to expand aggressively in Tier 3 through 6 cities and especially expanding our lead in those areas. So we feel very good about what's occurred. As a reminder of what we said in New York, David, was that we ended up increasing the new unit growth because of a couple of factors. One had been the even faster infrastructure growth that the China government has taken on, and Lily took us through that they're building these city clusters. And what that's doing is allowing new trade zones in places like train stations, bus stations, et cetera, but it's also developing new trade zones, as they're building new apartments in some of these cities as well, so that's led that growth. And the other piece that has increased our numbers in 2011, where it was really Pizza Hut development. And Pizza Hut -- a while back, we struggled in Tier 3 cities, our second unit in Tier 3 cities. We're having really good success in Tier 3 and Tier 4 cities now with Pizza Hut as we have more variety and better value in those restaurants. So I don't expect any of that to change in the next year or so. So we still have our guidance of at least 600 units, and I think it's safe to say we'll hit that 600 unit. Regarding further out, it's always been hard to predict when the next layer of unit growth has occurred. We were stuck on only 500 for about a 4-year period before we got to the 600. So I've still said historically that I expect the absolute number to grow over time, while the percentage continued to decline, and that's still my personal best guess at this point in time.

David C. Novak

I agree with everything that Rick just said, and just let me give you just a little bit more color about why we're very bullish about the development opportunities in China. I think the biggest tailwind, as I mentioned earlier, is just the growing consumer class, going from 300 million to 600 million people in the next 10 years or at least that. But then I think our whole formula for success in China has been geared on great local management team with phenomenal local operating capability. And we've always had one rule, we never want to expand any further than or faster than our people capability. Because we've got these brands that are so good, we just want to keep polishing the diamond. Now having said that, when you look at our operating capabilities, the best we have in the world, 90% of our restaurant managers in China have at least a college education. When I talk to Mark Chu, the President of China, he'll tell you that in every one of our KFC's, we have 2 new assistants ready to open up new stores when we're ready. So we have the people capability, and we know there are lots of people there that need jobs, want jobs, and we're creating all kinds of jobs there, so we have a tremendous environment that's set up for operating capability. In fact, our operating capability is so good there, we really see ourself as the training ground for retail development and retail managers in China. We have what we call the Whampoa Academy, where we're really developing talent to not only grow our business but we think will help other retailers as that country emerges by providing talent, which is fine. We basically tell somebody when they come out in school, in 4 years they can run a restaurant at KFC, or if they want to go start their own business, they'll be ready, or they can go work for another retailer, or they can become a franchisee. But we're like the Procter and Gambles, the king of marketing talent in the United States. We see ourselves as the leader in operating talent in China. The second big thing on people capability is just our development operations. Our development team -- we have 700 people in our development team. And we have the best retail management base in China. This is a huge competitive advantage as we go forward. And what I always say is that when you go into any of these new cities, we're going to have the flagship location and/or locations before our primary competitor even gets there. So we're going to -- so we have a huge competitive advantage there. So I think underpinning everything that we're doing in China is the operating capability we have. And I think it really is true, the formula of success in this business, you have the people capably right, you get that right and then you satisfy more customers, then you make more money. We're basically delivering that in spades. The only other thing I would say is what we're talking about now, in terms of our development engine is KFC, leader in QSR, Pizza Hut, leader in casual dining. We're obviously developing Pizza Hut Home Service. We're obviously developing East Dawning for Chinese quick-service opportunities as we go forward and we just bought Little Sheep because we want to have the leading brands in every significant category. So our goal, obviously, is to keep this development engine primed and pumped and take advantage of the significant opportunity we have to provide great brands in China, create lots of jobs in China, and make our business even bigger.

Operator

Your next question comes from David Palmer with UBS.

David Palmer - UBS Investment Bank, Research Division

A few just quick questions here. Could you describe or maybe give some numbers around how much of that company margin decline in the quarter in China was due to the higher new opens that were year-over-year in that quarter? My suspicion is that there's some sort of preopening friction costs in there. And then secondly, reimaging for Taco Bell in the U.S., can you give us an update there and refranchising for KFC in the U.S.?

Richard T. Carucci

Regarding the margins in China, by far, the biggest impact that we had, which we expected coming into it, was food inflation and labor inflation. There is an impact, to your point, on new openings as they went up versus prior year. We always have a lot of new openings in the fourth quarter. We think the impact to that is a bit over one point. Regarding KFC refranchising, I feel very good with the progress we've made. As I mentioned, in early 2011, we had spent some time working on a fairly large transaction that after we sort of turned our attention to smaller deals, we think we've made a lot of progress. So feel good with how we ended the year. I believe we are very well poised to therefore deliver on what we've set as finishing the KFC refranchising in 2012. And I think the final numbers, which is in our release, for the refranchising of KFC was 160 units in the fourth quarter.

David Palmer - UBS Investment Bank, Research Division

And reimaging for Taco Bell, where are you on that, and what's the plan there?

David C. Novak

Taco Bell, we think that the units are in pretty good shape, so we like the way we look in the U.S. We're continuing to upgrade our system. We think about 50% of our system is where it should be today, so we have work to do. But it's sort of normal pacing and sequencing. I think one thing that's always helps is we believe we're well positioned to have a strong 2012. So whenever franchisees are doing better, they're usually in a better position to invest in continuing to upgrade their asset.

Operator

Your next question comes from Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc., Research Division

I wanted to ask about a couple of things on China. First of all, with the new development step-up, can you maybe talk about quantitatively what you're seeing with the latest batch versus prior years? And then secondly, on labor inflation over there, do you guys feel like at this point, you need to take any proactive steps to address it, since as you said, you think comps are probably going to moderate and I'm not quite sure what happens to profitability if labor inflation stays at this rate but you don't comp at the rate that you're currently comping? And then lastly, in China, if I got it right, I think you said Little Sheep same-store sales are currently negative. I'm curious to hear why you think that is and what kind of a turnaround might be required for that brand?

Richard T. Carucci

Michael, remind me the first question. Labor was the second question, what was the first question?

Michael Kelter - Goldman Sachs Group Inc., Research Division

What you're seeing in the latest batch of Chinese openings versus prior years.

David C. Novak

Yes, still early on the China in terms of -- we've seen nothing different really, in terms of our performance for China new units. We haven't seen the fourth quarter ones yet, but the stuff that we had throughout 2011 were very similar to what we've had before, very high hit rates, very high return on invested capital. And the trend that has continued a bit is stronger performance in Tier 2 through 6 cities than in Tier 1 cities. So again, we're being more cautious in our Tier 1 cities, which we've been doing throughout 2011. But we feel very good about the performance of new units. The labor side to me is a bit gravity [ph]. We expect labor rates to continue to go up. As we've said before, that's a dual-edged sword. We'll obviously do the things we can do to make -- to have productivity in our restaurants. But my belief is that if labor inflation occurs at a high rate, we'll have to price to offset it as will everybody else. So I think that's how that will play out. Little Sheep, we really are just starting to understand the business. So we have teams that are going there now. The deal just closed at February 1, so the team is going through transition right now. We're welcoming the people who were part of Little Sheep into the Yum! family. We think they have high enthusiasm, high talent, so we're pleased to be working with them. But we really don't have a lot of insight into the performance last year. I pretty much shared what we know. And we're still trying to really learn more about the details of that business.

Operator

Your next question comes from Keith Siegner with Crédit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

So as the refranchising program in the U.S. continues along this path and you become closer and closer to being kind of this super highly franchised, very stable business, one thing I think that's been interesting is how you're franchise and license expense in the domestic business has actually moved substantially higher, not just in dollar terms, but also as a percent of franchise and license revenues. And I think in 2011, there was clearly some incentives as you talked about, maybe for Pizza Hut Delco. How should we think about that franchise and license expense either in dollars or percents going forward as you finish this transition with KFC and get closer with Taco Bell? Like where does that franchise and license expense end up when that program's done?

Richard T. Carucci

Yes, I think it'll be fairly close to what it is today, with the exception of, as we pointed out, the incentive this year -- sorry, in 2011, on the Pizza Hut Delco. So and again, what we were doing there is providing incentive for lower-cost Pizza Hut delivery units especially geared towards smaller towns. And it's a less expensive unit and that's actually -- had the desired effect. A lot of franchisees have built them. We ended up with net positive units in Pizza Hut for the first time in quite a while in 2011. We see that number increasing as we go to 2012. But the way that the incentive worked, we actually started -- was a 2011 -- sorry, 2010 and 2011 incentive, but a lot of the spending ended up in 2011. So that amount of money, I'd say it's probably about $4 million higher than what it normally should be. If you adjust for that, my guess is the percentages will be pretty constant going forward.

Keith Siegner - Crédit Suisse AG, Research Division

And at this point, there's no plan or talk of an incentive to encourage remodels or reimaging across the franchise system, is that right?

David C. Novak

We have various programs in place, but nothing major new at this point.

Operator

Your next question comes from Joe Buckley with Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Two questions as well. Can you talk about just the dynamics of pricing, check and margins in China? It looks like the check was up 1%. But pricing year-over-year by the end of the quarter looked it was, I think, up 7% based on what we track. Just kind of curious how that played out and how it looks in 2012. And then just a question on Taco Bell. Just wanted to get a clarification. David, I think you said Taco Bell was positive in the fourth quarter. The release had it down 2%, and I think you said it was positive here in the early part of 2012. So maybe you could just bring us up to date on that and maybe also address this salmonella issue if that's had any effect on sales.

Richard T. Carucci

Okay. Why not David go first with Taco Bell.

David C. Novak

Well, first of all, our sales in Taco Bell turned positive late in the fourth quarter, and they continue to be positive even in the most recent days. And so, as I mentioned, the event that you just talked about had no impact on our sales or transactions. And the event I want to point out took place last year. And if you would like any more information about that, just go to our website at the tacobell.com. But I think bottom line is, is that when we look at Taco Bell, we are extremely pleased that Taco Bell sales turned positive late in the fourth quarter, positive now. And we are readying for our Taco Nacho Cheese Tacos launch, which we think is the biggest innovation in the Mexican quick service restaurant industry in I don't know how long. But I mean, this is like we really took advantage of the fact that we have a great partnership with PepsiCo, went to Frito Lay, have the opportunity to launch Doritos Taco shells, which totally proprietary. No one else in the industry will be doing it. Very excited about that launch, which is coming up. We also have launched breakfast, I think, in a very smart way that we can make money. We just opened it up in 800 restaurants in the West Coast, starting it at 8:00, takes care a lot of the labor issues, and we think that we'll ultimately end up expanding that across the country, and having breakfast earlier, just like we expanded our late-night. The other thing that we're very excited about, which we now have in test, is a line of higher-quality category breakthrough value with a celebrity chef, Lorena Garcia, where we have new ingredients, new pico sauce, new meat, bowls. We think we are bringing Taco Bell value to a different line of products that are more premium, where we'll really just re-establish the category value, which we think is terrific. So there's lots of really good things going on at Taco Bell. The franchisees are extremely excited about it, and we're very bullish that we're going to be able to have a outstanding year or at least a solid year this year. You pick your adjective, but it's going to be a lot better than last year. Okay, so we're enthusiastic. And longer term, as I've always said, we think Taco Bell is a huge opportunity for Yum! Brands. We're underpenetrated. We think if we can get a couple hundred thousand dollars more of sales volume, we can go from a little over 5,000 restaurants to 8,000 restaurants in the United States because we are the national competitor, so we really have a very dominant position. And as we -- we also look at Taco Bell as a global opportunity, an opportunity to begin to expand that around the world as well. So we're very bullish on Taco Bell, and upward and onward.

Richard T. Carucci

Joe, regarding your first question about China dynamics on pricing and margins, you pretty much have the pricing right. We had -- if you go back in 2011, we had a 3% pricing roughly in the first quarter. We had 2% pricing at the end of September, and we had 2% pricing in early November. So if you look at the impact in the fourth quarter, we basically had 3 months, because if you look at the September, it's right at the end of that month, so again, remind folks that the fourth quarter is a 4-month quarter for China, September, October, November, and December. So we had 3 months of the first price increase, and [indiscernible] of 2%, then we took another price increase early in November, also about 2%, and we got about 2 months of that. So we have little, about 5 months of pricing increase over a 4-month period. So the net effect of that was a little over 2 points of effective pricing that showed up in the fourth quarter this year. On the flip side of that, we had very high food inflation and labor inflation, as we sort of highlighted on the quarter 3 call, we ended up with 11% food inflation, about 18% labor inflation. So the impact on margins of that was about a negative 7%. And the overall impact we had on pricing was a positive 5%, that 2% I talked about in the fourth quarter plus the benefit of 3% in the first quarter. So that's really what the big factors were in the margin decline. As you look forward to what we expect in the first quarter, just a couple of things to keep in mind. One is that some of that pricing rolls off because we took the 3% pricing during the first quarter last year. We still expect high food commodity in the first quarter of next year, although our indications are that commodity inflation will get better as the year develops in China. And we'll have a little bit of higher benefit from the pricing we just took in the fourth quarter.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And Rick, when do you lap the value initiatives? Like when should that mix impact become a little less significant in China?

Richard T. Carucci

I'd say by the second quarter. We started -- we have different value pieces. So just to put that in perspective, our -- what we call our value mix. And again, we have it in all the day parts, it's breakfast, lunch and afternoon tea are the 3 areas where we sort of have some value combinations. If you add that up, Joe, it's about 10% to 15% of our mix, so they're in those value layer that we have, which is about what we wanted. But a lot of that came in the first quarter but some of it came in more aggressively in the second quarter. So again, that's the reason why first quarter, I don't expect heroic margin results. But I expect margins to get better as we get into the second quarter and beyond. And what we've said before is we expect margins to be better on a year-over-year basis by the second half of 2012.

Operator

Your next question comes from John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

First, just a follow-up on that question and your comments on China this quarter. Have you actually begun to lap the value initiatives from -- I think you started with breakfast and then went to lunch. Have you actually seen the year-on-year laps? And are you still confident in getting the traffic lift? Or is the first quarter sort of half you didn't get the laps and so it was positive and as you lap it, you're seeing more moderate traffic growth?

Richard T. Carucci

You'll see more in the second quarter. We lapped some in the first quarter as we eventually did some, but you have to be careful because Chinese New Year is such a big event in China. It's hard to get a real lead on that, so we'll probably know more when we get into the second quarter.

John S. Glass - Morgan Stanley, Research Division

Okay. And then just on the U.S. margin, one specific question, more a broad question. Specifically, you've got some nice occupancy leverage. And I don't think you got that in prior quarters, and I know comps got a little bit better, but it wasn't a massive inflection, so I don't know if that's a function of refranchising or some other element. That's the specific. And more broadly, Rick, as you hit your goals and say 13% of the refranchising of the brands, what would that do to impact U.S. margins? In other words, you'd reported a 12.3% I think in '11. If you were to refranchise all those stores today, how much better do you think margins would be?

Richard T. Carucci

Unfortunately, I think I have to get back to you on both of those questions, John. The refranchising impact we have is going to be somewhat significant, not as significant as some of the previous years, but we'll benefit in particular from the refranchising we did in 2011 on KFC. The Taco Bell we'll benefit less from because their margins aren't that far away from our overall margin level. So I would think it would be about at least 0.5 point but we'd have to get back to you with more specific numbers on that.

David C. Novak

And john, on the lower occupancy, that would -- that's -- part of that would definitely be some of the benefit of refranchising. So those will generally be lower margin stores, lower volume stores, so occupancy would be higher as a percentage.

Operator

Your next question comes from Jeffrey Bernstein with Barclays Capital.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Just 2 questions. First, a follow-up on the earlier questions on China, and related to pricing. Thank you for the sequential trends in terms of how much pricing you took last year. I'm just wondering, as you look further out into '12, I think you told us at the Analyst Day, you needed like 4-plus points to protect the margin, which I think you kind of said you hope to sustain that 20% in '12. I'm just wondering if you can update us on as you lap that, I guess it was 3% from the first quarter of '11. Is the current plan to take more pricing and therefore kind of still be running that 5% level? And is 6% food cost inflation still the best guess? I'm just trying to gauge the confidence of the importance of the 20%-plus margin in '12 and that sequential trend. And then I had a follow-up on the U.S. business.

Richard T. Carucci

Yes, I mean, right now, obviously, what we do with pricing will depend on what happens with inflation. And I'd say, right now, we're not changing our view of commodity inflation in China. We probably have a higher degree of confidence that it will moderate. I mean, we have it moderating in our forecast. I think our confidence of that has come up a little bit as we sort of just see what's happening in the marketplace there. So given that, what we've sort of said is we expect to take obviously some pricing in 2012. Our best guess is sometime in the second quarter, but that'll depend on how things play out a little bit. We have nothing planned specifically at this time, but that's our best guess, and the level of it will depend on if we see anything different on the commodity side.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

And that -- with the goal being to get it back up to roughly -- or sustain that 20% level is kind of the longer-term target for '12?

Richard T. Carucci

Yes. And again, I probably -- the way the math works is we think it'll be right around 20% for 2012. But I think the bigger importance from my standpoint is to make sure by the second half of 2012, we're at normal levels of margins. And I think that, to us, is also the 20% on an annual basis. So yes, I feel pretty good about our ability to do that by the back half of the year. And right about now, we're not changing what we sort of said in New York, where were we sort of said our best guess for full year 2012 margins is about 20%.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got you. And then just on the U.S. side, the G&A savings from refranchising, can you just -- if you were to kind of extract that, kind of how much that is and when you'd expect that through the year? I mean, how would you -- I know you're talking about return to profit growth in '12 in the U.S., but I'm just wondering about the sequential build on that. So how much is the savings? And how you would expect that to flow through the year in terms of U.S. profit growth?

Richard T. Carucci

Yes, there's sort of 3 big things happening in the U.S. in 2012 on a G&A perspective, so it may be hard to be watching from the sidelines. One is we've actually made some changes. As we restructure our business, it'll generate G&A savings. That number is about $30 million, so it's like 3 $30 million numbers to keep in mind. That'll benefit us in 2012, right? So we'll get benefit from that, roughly that amount. Another $30 million, unfortunately going the wrong way as our pension costs are expected to arise. Most of that, and that'll happen at the Yum! in U.S. level -- most of that's at the U.S. level. So as we lowered our discount rate for the year, that's having a $30 million negative impact to our pension expense, which will hit G&A, mostly G&A. Some of it hits margin, but most of it's G&A. And then the third about $30 million per year is the actual -- the first $30 million of restructuring really occurs at all levels of the organization. As you actually refranchise units, you'll also get G&A savings from having fewer area coaches and those types of things. That will also develop during the course of the year. That last piece to keep in mind, though, is offset by lower revenues and profits that you get from a refranchised restaurant versus a company-owned restaurants. So we sort of said that last $30 million will be neutral. So it's -- so when you add that up, we probably expect G&A roughly to come down $30 million and for that to be offset by lower profits of company-owned stores. So when you throw it all in, it'll -- it should be negative to -- I'm sorry, flat to profitability but about $30 million favorable for G&A. Does that make sense?

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

I think just to clarify, it's $30 million positive from the first point; it's $30 million negative from the pension, which I would think would roughly offset each other; and then the third one is the savings from the fewer area but it sounded like there was -- that was going to be net neutral. So it sounded like the G&A in total would really not change in either direction.

Richard T. Carucci

The last piece of it will be neutral for profitability but favorable for G&A.

Operator

Your next question comes from Jason West with Deutsche Bank.

Jason West - Deutsche Bank AG, Research Division

Just one quick one and then a longer-term question on YRI. But on China, did you guys make any adjustments to the value program in the fourth quarter that sort of caused some of the improvement in the mix trends there? And then, just secondly, on YRI, I guess going back to the same question on unit growth in China, are you getting to a point where you'd feel comfortable raising the gross new unit openings at YRI, or do you feel like you're going to be at this level we've been in the last few years for a while?

Richard T. Carucci

Yes, on the YRI piece of it, we're pretty pleased with what we have. We've covered a lot of that, I think, at the Analyst Meeting in the sense of we are building -- we've been getting close to critical mass in certain countries, France, Germany, Russia, it's a little early for Africa yet, where we think we could start to accelerate development, but we're not ready to make that call for 2012. So I do think that there's a good chance over time that number goes up in total, but right now, we're just sort of calling it similar to where we were.

David C. Novak

The other thing, Jason, on YRI unit growth, it was 4% net for the year, which is definitely on the high -- if you look at trends for YRI, that was on the good side of the trend, so we feel very good about that as well.

Richard T. Carucci

On the value question is, is part of the November price increase that we talked about included lowering cost of sales in some of our value initiatives in China. And that was pretty much in all the areas, in breakfast, work day, lunch and afternoon tea. So we tweaked our value offerings everywhere there. There were, I'd say, minor adjustments but included in that 2% number I gave you.

Operator

Your next question comes from Mitch Speiser with Buckingham Research.

Mitchell J. Speiser - Buckingham Research Group, Inc.

And regarding China, when we think about the 20% margin on a longer-term basis, the food and paper line's about 35% of company sales. In the U.S., it's about 30%. Now commodities are rising, but do you think that there are structural improvements in sourcing and distribution and perhaps other areas that could take that food and beverage number, that percent down over time to where the U.S. level is?

David C. Novak

Yes, I think that was probably true a while ago. So one of the things that occurred until, I'd say, the last couple of years is we were able really to not take any pricing and really get a lot of efficiencies on our cost of goods, just through buying for thousands of units versus buying for hundreds of units. It's realistically probably less. I think there's some upside but not -- going forward, but not as big as it has been historically. And the higher food cost in China, I think were done intentionally, in that we wanted to make sure we provided a lot of value, and we could afford to do that because our labor costs were lower. So we've always had good value in China. Obviously, if labor costs creep up, we'll have to figure out how to deal with that. And some of that may be by reducing our food costs, but obviously, we look at all parts of the P&L and pricing to manage that.

Mitchell J. Speiser - Buckingham Research Group, Inc.

Okay. And separately, on Pizza Hut, a great quarter off of a pretty tough comparison. Can you give us a sense, do you think it was more company-specific initiatives? Is the category reaccelerating? Any thoughts on the Pizza Hut comps from that -- or further thoughts would be great.

Richard T. Carucci

Mitch, are you talking about U.S.?

Mitchell J. Speiser - Buckingham Research Group, Inc.

Yes, in the U.S. I'm sorry.

David C. Novak

I think Pizza Hut is just building on its foundation of value that was established with the launch of our $10 any program, and we continue to bring the $10 message forward. Plus we had the combination of the low end, the $10 large pizza any way you want it combined with the $20 box meal that we came up with, which was an innovation in terms of bundling. So I think as we look at Pizza Hut this year, we think we've got -- we're going to have -- you will see the combination of more value and the constancy of that value and the creativity around how we bring our value message to the marketplace, plus you'll see continued innovation, you will see the typical innovation that we're pretty famous for in the category in terms of pizzas. We also, Mitch, continue to drive our Pasta business on Tuesdays and our Wings business on Wednesday, leveraging the asset throughout the day. So I think the great thing about Pizza Hut right now is we feel like we have a very solid foundation from -- to build on. In years past, we were so dependent on just the marketing whizbang pizza of the year. And I think with our everyday value proposition being what it is now, we have a much more stable proposition to build on as we go forward. The other thing that we're very excited about is that we are working very hard on the operating side. We think there's significant opportunity to improve sales just through getting our pizzas to our customers faster, drive more productivity inside the store in terms of speed. So we think we have a lot of initiatives that will give us confidence that Pizza Hut's going to keep moving forward. I think the big chains are doing better now overall, because we've all improved our value proposition. And certainly, we've led the way with that at Pizza Hut.

Operator

Your next question comes from Yang Huang with Sanford Bernstein.

Yang Huang

This is Yang in for Sara Senatore. My question is can you talk about the food and labor inflation cadence through 2012, in the U.S. and YRI, and what's the likelihood and timing of pricing in those regions?

David C. Novak

Yes, it's really hard to generalize on YRI and -- but in general, I'd say the same thing that we sort of see in China is that we -- similar in the U.S., we would probably expect more commodity inflation in the first half of the year and less commodity inflation in the last half of the year. Labor, I don't think there's any significant difference in expectations on timing during the course of 2012.

Yang Huang

Okay. And how about the pricing expectation?

David C. Novak

Again, I think similar to China, in the way that we'll probably take some modest pricing early in the year and then sort of reassess depending on what commodities do later in the years.

Yang Huang

Okay. That's for both the U.S. and YRI?

David C. Novak

Yes.

Operator

Your next question comes from Andy Barish with Jefferies.

Andrew M. Barish - Jefferies & Company, Inc., Research Division

Sorry if I missed it early. Just on the overall, your best guess on the overall U.S. inflation number for the year? And then are there any cost impact of the Taco Bell upgrades that David was referring to?

Richard T. Carucci

First of all, Andy, the upgrades have been pretty much consistent through the past probably 3 years. So no, in terms of company side P&L, there wouldn't really be anything incremental to that.

David C. Novak

On the commodity side, our numbers we had outlined previously were about 6%.

Richard T. Carucci

It's 6% for China.

David C. Novak

Right. And about 2% for the U.S. and 5% for YRI.

Richard T. Carucci

Those numbers are basically the same as we -- for everyone. Those were the same numbers that we laid out for everyone in the New York meeting. So we haven't changed any of our expectations.

Operator

Your next question comes from Larry Miller with RBC.

Larry Miller - RBC Capital Markets, LLC, Research Division

I had 2 questions. One on Taco Bell breakfast. What kind of mix are you expecting? Can you give us that in either percentage terms or dollar terms? And then secondly, on Little Sheep, I understand it's a new business, but you probably have seen the economics. Can you talk about the economics? And then, can you give us a sense of how the China team is prepared to handle not only fast growth but managing 5 brands. Is that too much? Or are they very prepared for this?

Richard T. Carucci

On the Little Sheep, I really -- I'll remind a couple of things that I said. Don't have a lot more to say, because again, we're busy both transitioning people in and quite frankly, figuring out exactly what we're going to do in several of the areas of the business. So really, as we mentioned, we know that 2011 didn't end on a strong point, but we really haven't done the diagnostics of what we're going to do to address that. But again, we feel very good about the category and the brand. Remind people, although hotsy [ph] are not well-known here, it's a $5 billion category in China. They're the leaders in that category, and we believe that the expertise that we bring plus the experience and the brand that they have will be a good long-term partnership.

David C. Novak

I think in terms of China's -- well, obviously people capability is what drives us in China, and we obviously believe we have the management depth and capability to bring on that brand or we wouldn't have acquired it.

Larry Miller - RBC Capital Markets, LLC, Research Division

Okay, that's fair. And then on Taco Bell, on the breakfast, what are you guys expecting? Or what should we think about?

Richard T. Carucci

We really -- we've just started, so we feel good about what's happened so far but we haven't seen hard data on it now. The biggest thing to me is our -- to me, the leading indicator is going to be do franchisees who don't have it want it, based on how the franchisees who do have it. And I think it's too early to make that call. But that's obviously something we're going to keep in touch with during the course of the year. And a reminder, one of the reasons we went with this strategy is it's a lot more affordable for us and our franchisees from a labor standpoint. So to me, unless -- what we want to make sure of is that the -- that we're able to coming close to cover our costs by opening that hour or 2 earlier, and we think we have a very good chance to do it, which is why so many people signed up for it.

Operator

Your next question comes from Bryan Elliott with Raymond James.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

I'd like to go back to the China inflation, labor in particular, and just get a little more color on maybe thinking about the tiers of the employee base. Are we seeing, for example, higher inflation at the entry level or at the college-educated manager level? Or can you just peel that back a little bit?

Richard T. Carucci

I'd say it's pretty high across the board. I mean, labor inflation in China has been going on, really double-digit for a long period of time, but really ramped up about 2 years ago and especially the second half of 2010 and throughout 2011. So that's when we went and instead of seeing low double-digits, we were seeing high teens, even at 20% in the third quarter for us, for labor inflation in 2011. And it's pretty much across the board because the inflation, a lot of it's driven by increases in minimum wage. And the minimum wage increases have been in the mid teens recently, at the high teens, and so that's going to drive not just the lower group but pretty much everybody above them as well. And as we sort of said before, it's a dual sword for us because as people have more money on the positive side, they spend more and are able to afford our restaurants, but it gives us the cost to deal with. Our sense is that we may have more -- better labor inflation in 2012 than 2011. We sort of outlined that in our investor meeting. I think so far, what we've seen is consistent with that expectations. You've seen fewer markets increase their minimum wage at this -- versus at this point last year. So we're hoping to get back to mid-teen labor inflation in 2012.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

How about turnover trends? Has there been anything changing on that?

Richard T. Carucci

No. As David mentioned in his speech, one of the things that's been really a -- for me, a pleasant surprise is that we've been able to increase our number of college graduates, both college students and teen level. And as David mentioned now, over 90% of our restaurant general managers are college graduates. And five years ago, that number was in I think about the 60% range. So we've been able to increase our quality at the same time we're adding restaurants. And I think part of that I think is unique to Yum!. I think people know that they're joining a company that's been very successful, and they've seen a track record of people who started at team members or restaurant general managers growing to senior management positions within company. So I think we probably have a better shot at that than some of the other players.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Real quick on the U.S., any wage or turnover inflation of note yet?

Richard T. Carucci

No.

Operator

We have time for one last question from John Ivankoe with JPMorgan.

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

Maybe a little bit differently than some of the questions on China. As we look at the capital needs of the business, whether it's debt to EBITDA or debt to free cash flow, I was just hoping, that you could kind of comment on what you think the future direction of the balance sheet is. And whether it makes sense to take advantage of some very low interest rates even with your stock price where it is now, so that's I guess the first point. In other words, kind of above and beyond what you're generating in normal free cash flow and buyback. And then secondly, if I may, there's -- I mean, actions speak louder than words and the company has kind of generally made more developed markets, when I say developed, I mean, not for Yum!, but developed in general, franchise markets over time. And yet the company is investing capital in markets like France and Germany that are very developed and former [ph] Leading out markets and are competitive in some cases, especially against McDonald's. And I guess the point of that question is, and related to the capital needs question is, are you currently seeding markets with company dollars, with helping finance franchisees? In other words, is that more of a kind of a, hey, let's get the market started and then over time make it a capital-light market? Or do you think that those markets become -- if you're going to stay, will become increasingly or stay high capital-need markets in the future?

Richard T. Carucci

Well, regarding, John, the first part of the question, one of the great things we've had in China is we still are -- we've been positive cash flow for at least 5 years there, even though we've continued to ramp up development there. In terms of capital as a percentage of revenues or cash flow, I think it's -- expect that to go up slightly. And the reason for that is that as we build all these units, we have to remodel them at that point. So I expect our new unit capital obviously moves with our growth. So at a certain area, that'll come down because we've sort of said that we expect new units as a percentage of the base to go down over time. But we expect the remodels to go up because capital-light market -- right now, if you go back 5 years, we were remodeling stuff that was 5 years old. So that was like 450 units at that point. Five years from now, we're going to be remodeling 656 units. So when you net those 2 out, I'd expect a slight increase in the percentages. In terms of what we'll do with our cash, we gave you a sort of our best guess at this point, still about $800 million of share buybacks. We feel very good with what we've done in the last couple of years on the debt side, John. Otherwise, we would be probably more aggressive to your point now. But we already sort of borrowed at very low rates in the last 2 years and feel very good about those rates. And at this point, we're probably looking at keeping our debt as a percentage of EBITDA constant. So as we could grow that, we'll increase debt. But like you say, we'll always keep looking at that because the rates are very strong. But no change is expected there. On France and Germany, we will have fewer company-owned restaurants going forward. For those of you who weren't in New York, Ivan Schofield talked about how -- we have -- he doesn't really want to get to over 100 company-owned units in France. So we'll probably stick fairly close, a little higher than the number we have today. However, it's still going to be a pretty high investment model because we've elected, in France, to go with -- well, we call the business rental model, which, is our understanding, pretty similar to what McDonald's has in France and Germany, where we hold the lease and we charge the franchisees a percentage of sales. It varies depending on the level of sales. So that will still be a capital-intensive market for us but less than company-owned stores.

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

And that's something that you expect 3 to 5 years, for example? I mean, I understand that there's a need to seed franchisees and seed markets and get to the critical mass that you need for awareness and advertising and what have you, but that's at least the intention for the foreseeable future?

Richard T. Carucci

Yes, John. At this point, that's our intention. We've liked what we've seen so far with the business rental model in those countries. We think it facilitates growth, and we're comfortable sharing in the upside and downside of that market with the people, with our franchisees.

David C. Novak

All right. Thank you very much, for the questions, and let me briefly wrap this up. I'd like to do, if I just talk about one of the initiatives, we're very excited about this year, that we're really driving hard on. And it starts with the fact that for the past 15 years, I've been teaching a leadership program called Taking People With You. And more than 4,000 people in the Yum! system including franchisees have participated in this program. And as I talked about in New York, I recently wrote a book based on this program. Basically, taking people with you includes everything I learned about how to build and align teams to get results and it gleans the best know-how in the world, from top change experts, coaches, CEOs I've interviewed, met with in other leading companies. And what we've done is -- and we're doing now is we're making 2012 the year of taking people with you for operational excellence across Yum! Brands around the world. Basically, we take learnings in the book and we've created training guides that will be made available in 11 different languages to restaurant general managers all around the world. And they will be developing plans with their coaches on how to take people with them in their restaurant to get the single biggest thing that's going to drive performance, operational excellence in their restaurant. And we're very excited about this, because we think it's going to prove to be a real catalyst for us to drive what we call customer mania and improve operational effectiveness. And this is part of a major effort that we embarked upon a couple of years ago internally, which is to build world-class operations. We've been focusing very hard on putting more and more effort and diligence and process and discipline around operating standards and processes and making sure that they're executed. Because we firmly believe that while we have pockets of excellence and operations around the world, particularly in markets like China and India and even in the United States, Taco Bell is top-tier in terms of speed and accuracy, we think we can do better. So we're very, very focused on Taking People With You and using this as a way to drive even more performance in our stores and become more operationally excellent. So very excited about that. This is the year of taking people with you to drive operational excellence all around the world. And by the way, all the proceeds of the book, The Taking People With You, go to United Nation's World Food Programme, which we've made our global corporate social responsibility effort. And we build awareness of that, the issue of starving children all around the world, leveraging our system. So it -- all of this is geared towards us continuing to make progress as we build the defining global company that feeds the world. We want to have a culture that is world famous for recognition, everyone counts, make our brands vibrant everywhere we do business, with operational excellence the foundation, which we've made our single biggest priority and we will continue to do in the next 5 years. And then, we want to be a company with a huge heart, which is all geared around providing great jobs for people and also making a difference in the world with the World Food Programme. So very excited about this year, very bullish about the opportunity we have to continue our track record of generating at least 10% earnings per share growth. We always try to do the best we can, and we're very focused on really having an outstanding year and delivering returns for our shareholders. So thank you very much for being on this call, and we look forward to talking to you out in the marketplace and the next quarter. Thank you.

Operator

Thank you, ladies and gentlemen, for your participation in Yum! Brands Fourth Quarter 2011 Earnings Conference Call. You may now disconnect.

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