Yum! Brands, Inc. - Shareholder/Analyst Call

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YUM! Brands, Inc. (NYSE:YUM) December 7, 2011 8:45 AM ET


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

Mark Chu - President of Yum! China and Chief Operating Officer of Yum! China

Angela Loh -

Lily Hsieh -

Niren Chaudhary - President of The New Standalone

Samuel Su -

Muktesh Pant - Chief Executive Officer

Ivan Schofield -

Martin Shuker -

David Gibbs -

Greg Creed - Chief Executive Officer of Taco Bell


Jeffrey F. Omohundro - Wells Fargo Securities, LLC, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

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

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

John S. Glass - Morgan Stanley, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

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

Gregory R. Badishkanian - Citigroup Inc, Research Division

Unknown Analyst

Michael Kelter - Goldman Sachs Group Inc., Research Division

Mitchell J. Speiser - The Buckingham Research Group Incorporated

David Palmer - UBS Investment Bank, Research Division

Tim Jerzyk

Senior Investor Update Meeting. I'm Tim Jerzyk, Senior VP of Investor Relations, for those of you who do not know me. Welcome to the -- to those of you attending our event on the webcast, we appreciate you attending and coming to listen to our story.

For those who are not normally used to this, we will incorporate our Safe Harbor statement. There will be forward-looking statements in the management presentations today, and they are obviously subject to variability due to all the possibilities that we list in the Safe Harbor statement in our 10-K and 10-Qs. So please incorporate that into your thinking as we go today.

If you would look at the agenda just for a moment, I want to walk you through some of the logistics of the day. It's right on the front in your books. We have 10 presenters today, so it is a full day of presentations. We will have Q&A after all the main sections, so we'll give you plenty of chances to ask the presenters questions that you'd like to ask them. We will have one break. After Rick Carucci's presentation, you'll have a 15-minute break and then we'll be back for about another 2 hours. So please take advantage of the break. When we're done, there will be box lunches available, and we'll have about a 15-minute break after the main event. And for those of you who would like to stay for our financial modeling session, you're welcome to stay. That will be where we address and cover all your questions relative to the details for next year guidance or anything -- any questions that you have on the financial aspect of the company.

And so a frequently asked question as we go around and meet with investors, what is our policy on free cash flow? As you know, we generate a lot of free cash flow. It's a great important question. And we put a lot of thought behind that as we do with anything related to cash, to the shareholders’ cash. First of all, we pay a very good dividend, and we've established a very good track record of annual dividend increases. In fact, all of our annual dividend increases have been on the double-digit range and when you look at that, how that stacks up against other S&P 500 Companies, we're in an elite group. We feel very good about that. And then the rest -- so after we invest in the business and all the tremendous opportunities we have for growth around the world and pay shareholders a dividend, we return the rest of the cash to shareholders through share repurchases. And I'm proud to say we have a great track record of that. This goes back to 2004. You can see our record there and how we eliminated and reduced, basically reduced our diluted share count by well over 100 million shares.

And also I'm pleased to say that if you take a look at the average share price over that time frame of what we paid, it's an average of $30. The range is $20 to $50, which includes this year. So when you stack it all up, the total return of cash to shareholders, we are definitely a leader in that realm. And this basically looks at the last 5 years. So if you look at -- you can see the definition is across the bottom of the page, we were basically at 42% payout over that 5-year time frame, and we compare ourselves to like companies, global consumer name companies, that's what we call the Global Moguls which is the bar in the middle. You can see we're exceeding that group by 10 points. And then versus the market, we're almost doubling up on the market in terms of cash returned to shareholders.

Now one important slide that we always cover in this event every year, how we view the value of our company in terms of per share price. And I know you all look forward to this. Let me walk you through it quickly. We've got 2 different approaches on here. First is -- at the top in the chart is basically a sum of the parts and the way we look at it and then across the bottom, we also looked at it from a -- this kind of cash flow model perspective in a number of different ways. And we have several different really top-notch people looking at this. So let me take you through the chart on the top first.

Basically those are all cash flow multiples, and we're looking at pro forma EBITDA. So effectively, what it is, is EBITDA by each of these segments with G&A allocated where -- unallocated and corporate G&A allocated to each segment. So the first is China, and the China business is basically, that's China standalone with G&A allocated to it. It's about $1 billion in EBITDA, net of the G&A allocation. Our view of the multiple is in the 18 to 20 range. We posted that last year, and I know that some of you in the hallways and the rest of year asked me more about that and why we thought it was a 20. We feel very good about that today, because we feel it was vindicated. There's another growth company out there that's basically right in that range. So we feel very good about that today, even more so than we did a year ago. And where else can you get a business like that, that has a 5-year stacked comp in the mid-40s, growing units at double digits, and the territory that they are developing is still expanding. Cities are expanding. Cities are still popping up. It's a great opportunity to grow.

The next one is our -- basically our global franchise fees. By this time next year, we'll be approaching $1 billion in franchise fees. Tremendously diversified in their source from a geography perspective and by brand. It's pretty unmatched when you look at the types of businesses out there that generate royalties. That's about $700 million when you -- after you allocate G&A. Our view on the multiple on that is 12 to 15x. There's -- our view on this one is there's definitely, the market is telling us there's upward pressure. Last year, we used a 12 multiple. So this year we've ranged it to 12 to 15 because there's comps out in the marketplace that the market is assigning in the range of 15. So again, our view on that franchise fee royalty stream is 12 to 15 valuation, $9 billion to $12 billion in value. And then our company stores both U.S. and YRI. We assigned a 6 to 7 multiple, a value of $4 billion to $6 billion. The interesting thing about this, and I think you'll see this today in some of the presentations, the quality and the growth opportunities in that segment are only going to get better. You're going to see India, a presentation on India today, which has company restaurants and we'll have more into the future. You'll also see France, a presentation on France where we have great, great business there and there's company stores there. There's also Thailand in that. So there's definitely growth in that segment.

So altogether, when you put those 3 segments together with those multiples, the value per share is $66 to $78. And as I said, with this kind of cash flow, we're in the $65 to $75 range. And again as I said last year, you got to keep in mind we're adding value every day. China, YRI new stores, we're opening those every day, and there's tremendous shareholder value as we open those restaurants. Okay. So let's get started. I hope you're all warmed up. We got some stretching done. If you haven't, you will be now.

Let me introduce David Novak, our Chairman and CEO.

David C. Novak

Thanks, Tim. Okay. All right, I know you guys love this every year, but it's an annual tradition. So on your feet, we've got to do a Yum! cheer. Come on, stop the whining. Up. God, you guys need to get a life. Come on. All right. Give me a Y, give me a U, give me an M. What's that spell? What's that spell? What's that spell? God, you guys are absolutely pathetic. Worst ever. Worst ever. I want to thank all of you for being here this morning with us. In particular, I want to thank all of our shareholders who have put your trust in us, and I'm here today and to speak on behalf of the team to tell you that we've never really been more confident about the future that we have at Yum! Brands. In fact, the theme of this conference is on the ground floor of global growth, China and a whole lot more. And as we've gone through the presentations and more importantly seen the business around the world, I think this is a story that is getting stronger and stronger at Yum! Brands, and I'm confident that you'll walk away with the same impression after hearing the presentations today.

Now we have 4 major strategies that we've been pursuing over the years. And those continue to exist. Basically, it's to build leading brands in every significant category in China, expand aggressively around the world outside of China, improve our business in the U.S. and continue to drive industry-leading shareholder and franchisee value. So we're pursuing these strategies with a lot of passion. And I was thinking about what can I do -- what's the best way for me to really share with you the progress that we're making against these 4 strategies. And I thought about a lot of the conversations that I've had with many of you in my offices or here in New York or in your offices. And one of the questions I often get from investors is what do you see on the inside? What do you see on the inside that's happening in your company that we may not see? What do you see that maybe the numbers don't tell you? And I thought well, what's the best way to really answer that question for you? And I thought about what I do when I go out into the marketplace and go on all my trips. One of the things I do is I publish an internal blog. And I take pictures with my Blackberry. I capture the observations that I have, and I share it with everybody internally. And today, for example, I'll take a picture of all of you and talk about the analyst meeting that we have in New York. So I thought why don't I go back to the blog and pick up some of the highlights? Now, why do I do this? There's 2 reasons why I do this. One of the things that I've learned in every company, you get your teams more motivated with the basic notion: The more you know, the more you care. So people in our company are intensely interested what's going on around the world. They want to learn more about the business. So this is a way for me to tell people what I'm seeing, what I'm learning, share best practices, talk about the know-how that I see that's being built all around the world.

The other reason why I do it is it makes a big company small. When you have that constant daily interaction with the CEO of the company, it makes the company smaller no matter how big you get, and this company is getting bigger and bigger and bigger, as the numbers clearly indicate.

So let me talk about what I'm seeing as we build the leading brands in China in every significant way. Now this is a -- one of my favorite pictures. This is me walking with Sam Su, the Chairman and CEO of our China business at Happy Valley Amusement Park on the way to the RGM conference that we have every year. Every year, we bring all of our RGMs together and talk about the future. So Sam and I, we're on our way to the auditorium. Sam and I are walking down the main drag of Happy Valley Amusement Park. There's a Pizza Hut right there. We passed by, go in and talk to people. On the right there, on my left, there's an East Dawning which we've opened up which is our Chinese fast food concept that we've been developing. And you can see there, I'm actually taking a picture of the KFC with my Blackberry, which isn't shown on the slide.

Now all of this is within one block. You're seeing 3 brands which really demonstrates the total ubiquitous nature of our business. We are literally everywhere. And we have tremendous opportunity to go going forward. Then I had the opportunity to go in and address all the now 4,000 restaurant general managers, and it was quite a sight. Now I don't know a lot of Chinese, so I have Sam Su as my interpreter. I do know ni hao, which means hello. I know that xie xie means thank you. And then I also know this very important phrase called Dor Gaishe, which means build more. And I say that wherever I go, build more, build more, Dor Gaishe.

And then I got the opportunity to go and to speak to this group. Now this group, unlike you, they did not give a pathetic Yum! cheer. This group is fired up. And I did my very best. I did my very best to motivate the troops. I always do wherever I go. But I have to tell you, I came away inspired by them, and I always do when I go to China. Because we have such an incredible caliber of leadership there. We have -- over 90% of our restaurant managers have at least a college education. They run big businesses. They're passionate. They're avid learners. They're customer maniacs. I have team members literally line up when I go into stores to tell me their customer mania stories, in English that they've memorized. But you can't really capture the kind of passion and conviction that these people have about growing their brands, growing the business and, just as importantly as it's all linked together, growing themselves. Now this kind of passion and this kind of RGM capability is our -- is absolutely our secret weapon. It's why I can stand up here today and say that we're going to open up over 600 restaurants in 2011.

And it is why we believe that, that number will continue to grow over time, because you have that RGM capability. Now speaking of RGM capability, I want to talk about just one experience that I had in my most recent trip a couple of months ago to China, I went to -- well, first of all I want to talk about this. Forgot this, I got a little carried away. But one of the things we're doing with our restaurant general managers is we are -- we think that we're in a very unique position to really have branded, employee -- branded employment. And in China, one of the things in China that -- there's this famous institution called Whampoa, which is like the same thing as the military U.S. Naval Academy, U.S. West Point here in the United States. So what we're doing in China to continue to bring in great RGMs like you just saw there and build capability is we created the Whampoa -- Yum! Whampoa Academy, where literally our employee promise is that you can come into our Chinese business at any one of our brands, within 4 years you can become a restaurant general manager out of university. You can either become a restaurant general manager or become a franchisee or we will prepare you to go run any retail business in the world.

And so basically what we are doing is we're really -- Procter & Gamble is a place where you develop marketing talent in the United States. What we are doing is we're building a reputation, and we have the training program to back it up with Whampoa Academy that we're really building the retail industry in China. We are the place to go if you really want to learn how to be a general manager and to run a business, and this is very, very powerful. And this gives me even more confidence about the RGM capability that we're building in China that's going to allow us to open up over 600 restaurants a year. And here's a great example of a great RGM. This is Lou Ming. Now, Lou runs this restaurant, the KFC, which is down in the lower left-hand corner here. This does -- in Suzhou's train station. It does $40,000 a week. Then he goes upstairs and takes food upstairs to a KFC Select, which is a limited menu which does $60,000 because there's more foot traffic in that area. So this restaurant manager has 100 employees and he does $5.2 million in sales a year going upstairs, downstairs. Unbelievable. And we have -- these high-speed rail stations are growing rapidly. It's just an example of the kind of places we're going into now that we really didn't even have as real opportunities to add new units as we go forward.

So clearly we have tremendous RGM capability, and we're penetrating new places and this gives us an incredible capability to keep growing very rapidly as we not only open up KFCs, we open up Pizza Huts, East Dawnings, Pizza Hut Home Service and ultimately, Little Sheep. Now what's the biggest change I've seen? The biggest change that I've seen is that when I went to China in 1998, the thing that struck me was how parents and grandparents would line up to go buy some Kentucky Fried Chicken for their child. And then they would watch them eat, because they couldn't afford it. True. Literally, they would -- they couldn't afford to eat themselves, but KFC was such a hot and upcoming concept and kids love it. They wanted to give their kids the opportunity to eat at KFC. But now when you go to KFC today, this is what you see. It's typical KFC lunch. I mean, if you've been to China, you've seen it. We have a broad, ubiquitous, consuming, buying class today that didn't exist. We are totally becoming more and more accessible by more and more people.

And there's going to be a lot of challenges that we'll have in China in the coming years. The inflation, food cost, there'll be lot of challenges that we'll have. But the one tailwind that we have that I think is absolutely undeniable and unassailable is that we've got a growing consuming class today, the experts tell you it's 300 million, within the next decade it'll be 600 million. And that is a tailwind that gives me enormous confidence that we're going to be able to build leading brands in every significant category, and you'll hear more about how we're doing that a little bit later on today. But our story is much more than China now. We are driving aggressive international expansion and building strong brands everywhere. And someone asked me earlier, what am I most excited about? Well obviously, I can't -- we're still in the ground-floor growth with China, but I'm extremely excited about the fact that we are really -- we've made tremendous progress up against our strategic initiatives to get the table set for much more growth around the globe.

And the first place I want to talk about is what's going on in India. Niren Chaudhary and the team in India have done such a phenomenal job of making our brand relevant in India, that we have really improved our business model dramatically. We're opening up in many different locations across India, and we are definitely in the expansion mode. And I am so confident that India is going to be a great story for Yum! Brands and our shareholders that recently we made a decision to make India -- break India out as a separate division, just to showcase the opportunity we have into -- in terms of driving new units and ultimately more and more profitability as we go forward. But the brand is very relevant. We have veg and non-veg products. We give kitchen tours to show people how we give you the opportunity -- veg or vegetarian if you want or you can have chicken if you want, which really has eliminated some of the veto votes that might exist out there and broaden the appeal.

You've got 60% of the population is under 30 in India, and beverages are very, very popular. So we have a frozen beverage line called Krushers. It's 8% of our mix in India. We're also building these Krusher kiosks in high street, great flagship locations where we can really showcase our full line of products that we have. My favorite product is the Choco Peanut Krusher. I mean, it's absolutely sensational. And also by the way, I love the veg Zinger. It's a spicy vegetarian sandwich that absolutely blows away competition. But what we have right now in India is a KFC brand that is broadly relevant and is a brand that has tremendous upside as we go into the future.

Now, let's talk a little bit about Africa, a continent of 1 billion people. We have a beachhead in Africa and South Africa with 600 restaurants. And we're one of the top brands period in South Africa. And our team is doing an outstanding job growing the business in South Africa. In fact, what we recently did is we took some equity in South Africa because we wanted to have an operating capability that would help us expand across the continent. And in the last year, we've gone into 5 new countries in Africa, and this is a shot right here of a new unit that we just opened up in Ghana. And as you can see, it's packed. We did over $15,000 a day in our opening week and people absolutely love our products all across Africa. And like most emerging countries, our products and our brands are very, very aspirational.

In fact, true story, in Nigeria, this is a picture of where we recently had a wedding reception. And this couple called up our team there and asked if they could have a wedding reception because the restaurant is so nice and people love the brand so much, and we promised that, we said we would let you use the upstairs if you promise that the wedding couple would share a bucket of original recipe till death do them part. Okay. And -- but this is a kind of aspiration that you see in these emerging markets and just the kind of broad appeal that we have.

Now here's Russia, moving onto Russia. Five years ago, we did I think one of the most innovative deals in our industry. We wanted to get into Russia, but we didn't really have any presence. The #1 chicken chain in Russia is Rostik's, it's run by a guy by the name of Ordovsky Rostislav. And what we did is we made a deal where we -- he would become our franchisee, we would co-brand with KFC and ultimately we'd have the opportunity to buy them out. Interestingly, this is how KFC started in the United States. Colonel Sanders went out and sold out -- sold his recipe to people, like Harman's restaurants would open up and say and featuring Kentucky Fried Chicken Original Recipe. Well, we basically took that same model into Russia, which was very important because Rostik loved his name being on the signage. And there's no way we would've been able to do that without doing that initially. And now we've bought him out. Now this unit right here is in Siberia. Thank God it was in the summer when I was there, okay. But it's -- obviously, it's not the best representation of what we want KFC to do. But this business in Siberia is booming, almost $1.4 million average unit volumes, great RGMs. Every restaurant manager we have in Siberia, believe it or not, has a college education. Two of them are trained lawyers and one of them is an electrical engineer. And so this is a great example that even where we don't have our brand in its greatest form, we're doing fantastically well.

And in Russia today, we have over 150 KFC Rostik's. We have great margins, and we haven't even begun to do the brand right. Now this next picture is one that I took in St. Petersburg. This is Vlad, our Russian franchisee. I love his wife. She was there. Very proud guy, but he's proud of displaying this KFC which had just been converted from Rostik's/KFC to KFC stand-alone. It's right across the street from a subway station. But clearly, we're in the midst now of converting the brand to KFC only. We're getting great results on it. And remember, McDonald's makes $300 million in Russia alone. And we're ground floor here. But now we have a base of 150 restaurants to build from as we go forward, so very excited about the opportunity that we have in Russia.

Now let's move on to France. This is in the culinary capital of the world, Lyon. This restaurant does EUR 75,000 a week. Now what's really interesting about this is KFC in France started out as an inner city, highly ethnic concept in Paris. And the big challenge was, was how much breadth, how much ubiquity could we have as we expanded the brand. And one of the things that Ivan Schofield will show you today is just how much success we're doing that as we go into provinces and cities like Lyon. And the reason why we're so successful is that our concept is broadly appealing. I mean this is a picture that I took during lunch. And what's very interesting is we have less than 10% chicken on the bone sales. Most of what we sell is very portable, off the bone, sandwiches, as you can see the Brazer sandwich up there is like our non-fried sandwiches. We have a full line of desserts, but a very modern, contemporary, relevant menu that is driving great sales and great success in France.

Now this is a tremendous model for us as we think about how we expand across Western Europe. And take a look at this KFC that I just visited when I was in Frankfurt. This is a great KFC with a playground obviously, doing great sales now. In Germany, we have 75,000 -- excuse me, 75 restaurants. We're doing EUR 40,000 a week on average. We have mid-teen margins. We actually do more transactions in Germany than we do in France, but France has the highest average unit volumes in the world. So we're really getting to that point in both France and Germany where we can really start expanding even more and more aggressively. And across Europe and around the world, one of the things that we're doing in Germany and we're doing everywhere as we go forward, is we think that our unique selling proposition for KFC is the fact that we bring in fresh chicken and everything's handmade, hand-prepared, freshly breaded and the fact that it's in-store prepared really separates it from the rest of the category. In fact, the selling line that we have in Germany is, is this fast food? Because we bring you food that's so delicious, so tasty, so freshly prepared, it's hard to believe that it really is fast food. And our customers see the difference and acknowledge the fact that we have real taste superiority.

This one picture of the mini filet bites with a person that's holding it up. That's one of the new products that we recently launched and it's -- it features our freshly prepared, freshly made, filet bites which is like a nugget which most nuggets are processed, but ours are freshly prepared and absolutely delicious.

Now what's great about -- what I get so excited about when I see what's going on in Western Europe is that I know that McDonald's makes $1 billion in France and Germany alone. And we make less than $100 million. But I'm also seeing the fact that we have great local teams now that have built the concepts, made them broadly relevant. We have great margins, and we're getting in expansion mode. So Western Europe is something that we're very, very excited about. Now it's China and a lot more. There's just 4 real quick snapshots. Picture up on the left there; that was the 44th opening that we had in Hanoi when I was there in 2008. Now when you go back to Hanoi, we have 113 KFCs, all with unit economics that are similar to what we have in China and India, actually better than India. So fantastic business that's growing. There's 85 million people in Vietnam, 85 million people.

Now up in the right-hand corner is a picture of an Indonesian customer. Now in Indonesia, there's 250 million people in Indonesia. We have 400 KFCs; McDonald's has 100 stores. We actually have 200 Pizza Huts. But this -- I found this to be really interesting because it just shows how relevant our brand is. This lady is holding up a KFC music CD. We take local bands, create CDs and then we sell them in our Indonesia units. We sold 4.5 million, 4.5 million CDs last year. For Sam Su in China, one of the places where he got his source of inspiration for how to grow China was from our franchisee [indiscernible] in Indonesia. And our brand, our KFC brand in Indonesia is unbelievable. We only have 2 stores per million people. In Malaysia, we have 18 stores per million. So as that country emerges and grows and develops, we're well positioned with both KFC and Pizza Hut.

Now down in the lower left-hand corner, you see Francisco Rivera. This is a franchisee we have. One of the great things about internationals, 90% of our business outside of the United States is run by franchisees, and Francisco is one of our best. He has -- he's opening up Pizza Huts in Guatemala, and he's opening up and proudly displaying his breakfast menu. Because one of the things we think we can do with Pizza Hut Casual Dining, and he's leading the way on this, is we think we can take the breakfast occasion and offer midscale breakfast just like Denny's and Bob Evans, leveraging our asset throughout the day. So we're working on that. It's one of the things that I see that I'm excited about, because I think it just makes such common sense and has such potential for us as we think about leveraging our Pizza Hut asset throughout the day.

And then we've been opening up Taco Bell. In the last 2 to 3 years, we've opened up 10 new markets. This is one where we cut the ribbons in Dubai, at the largest mall in Dubai. Now it's going to take us a decade to really get Taco Bell up and running in a lot of these countries, but that's okay. Because we're just building the pipeline, and Yum! -- we can take our time developing this business. We're acting with urgency, but the fact of the matter is, is that we've got the opportunity to build a global brand. It just takes time to get the brand tailored, localized and supply chains established, the value proposition right, but we will definitely make Taco Bell a global brand someday. And we're seeing good progress on that front. So clearly, when you look at what's going on around the world, we have a dramatically better proposition today than what we would've had 5 years ago. And it's China and a whole lot more.

Now let's talk a little bit about the U.S. business where we need to dramatically improve our U.S. brand positions, consistency and returns. Now obviously, this has been the biggest challenge that our company has had. And I think for us what we see the real opportunity is around brand renewal. It's getting more and more focused on the basics of operations, more and more focused on the basics and the importance of assets and really delivering our customers reliable experiences. And I think we're making significant progress, progress that you obviously can't see in the numbers this year because we've gone the wrong way, but I'm very confident that some of the things that I'm going to talk about are beginning to pay off, and will make a difference as we think about growing this business.

Let me start with Taco Bell and I don't want to steal a whole lot of Greg Creed's thunder, the CEO of Taco Bell, because he's going to take you through the overall plans. But one of the things that I've been doing is I do unannounced market tours. So I'll get together with Rob Savage here, who's on the left of this picture here, and he's the COO of Taco Bell. And I'll say, okay Rob, we're going to Toledo today. When we go to Toledo, they don't know we're coming, we see the business the way how it really is, not the way how we want it to be. And this is right here in the middle is Justin Tracy. He's the restaurant general manager for Taco Bell in Toledo. And we had great restaurant managers, we had great experiences and I was able to try our new tacos that Greg's going to tell you about it. I think we totally reinvented the taco, have dramatic news that we can introduce. But one of the things that I see is just the improvement that we've made in operations at Taco Bell. We're in the top tier basis, QSR magazine's independent survey in both speed and accuracy and #1 for having the right taste of service. So literally, our operations are getting better and better and that foundation gives us a tremendous amount of confidence as we go forward and we begin to introduce what we think is a great deal, a very relevant and powerful innovation coming that Greg will talk about.

A little bit about Pizza Hut. Now Pizza Hut last year did a fantastic job of really becoming -- having the leading value proposition with our $10 any pizzas. And so this year, we've had a solid year. Historically, we have one good year at Pizza Hut. The next year, we'd have a boom, then we'd have a splat, and we really didn't build up a consistent base. Well, now we have a consistent base. And there's 2 things going on, on the inside that I see that gives me a lot of confidence about the future. Number 1, we put a maniacal focus on operational excellence, and we've been working on new processes and new tools to help us become much more reliable much faster. And we have in test a program where we're really going after $1,200 of incremental sales each week just through operational growth. And this is a picture of a dispatcher in one of our Pizza Hut delcos that I took where I observed what's going on in the restaurants to help us improve our customer service. And we're seeing in our test markets that we're very close to achieving that goal.

And our franchisees are excited, and I think the push on just saying, hey, listen, operations should be so good, it should drive sales and there's tremendous opportunity on that front, is beginning to take -- pay off for us. And that, along with value and the innovation that we typically have at Pizza Hut, I'm confident we'll be able to have steady growth at Pizza Hut. But one of the things you might have read or heard in one of the analysts calls or earnings reports, this is the first time in 10 years that we've had net new unit growth at Pizza Hut. And one of the reasons why is we developed a concept called Delco Light. And it's a low-cost unit. Now this unit over here on the right is the Delco Light. It's in McCraig, Georgia which is a small town with 2,500 households. It's an 1,100-square-foot unit that's doing $20,000 a week. And our franchisees now are opening these up in small towns and seeing the same kind of success. So we're very excited about growing new units at Pizza Hut. And we think we can go into C&D counties, small-town America, and we can go from more than 6,000 points of distribution to 8,000 over the next 8 years, because the business model is so powerful and our brand is powerful and we can become much more accessible in communities that would like to have a Pizza Hut, a national branded chain that happens to have the best-tasting pizza in the world. Okay? Very excited about the fact that we've stabilized Pizza Hut and now have a platform for solid growth as we go forward.

Now KFC. KFC has been a big challenge for us as you know in the United States. And last year I stood up here and said listen, the biggest problem we had was we didn't have unity of purpose, that we were fighting with our franchisees. And that we had a long ways to go until we got everybody on the same page, I couldn't stand up here and tell you that we're really going to dramatically turn the business around. But we still have a lot of wood to chop at KFC. But I can tell you, there's a new spirit of working together that we haven't had in a long time. What's happened is that we have new leadership with John Sylinzsky as the President. He's worked with the franchisees. And in the last year, we've got a program where they're investing a new holding cabinet so we can have our product more available and hotter and fresher, investing in new IT systems. They've agreed to take their national media contribution from 2% to 4.5%, and we're aligned around the strategy.

One of the things that John asked me to do was to teach my taking people with you program to the KFC franchisees. So we brought in 80 of the top KFC franchisees. We spent 3 days together. And we went through this leadership program I've been teaching for the last 14 years at Yum! Brands. But we got aligned around the strategies that we need to execute, the importance of operational excellence and the importance of building this business up from the ground floor. And by the way, one of the exercises I'm teaching here is what we call the accountability ladder. And I think where we've been at KFC has been together, franchise and company is very low on the accountability ladder. We've been in this area called I can't do it, blaming others and waiting and hoping for the business to get better. And what I can tell you right now is that the business has gotten to the point now where there's a huge sense of urgency to make change and that we have acknowledged reality as a team, everybody owns it and we're moving our way up the accountability ladder and because of that, I think we have a real chance to begin to turn this business around. Last year I would have said no chance. This year I'd say some chance.

So when you step back and you look at what's going on in China? What's going on in the rest of the international and what we're doing to make progress in the United States? Very confident we're going to be able to continue to drive industry leading long-term shareholder and franchisee value. And I think one reason why I'm confident and hopefully one reason why you should feel confident that we could do this is that we've done it. It's one thing to stand up and tell everybody you're going to do it but if you haven't done, it's hard to believe somebody. But I think the real point here is that we've done this for over a decade now, averaged at least 13% earnings per share growth. We have also added great shareholder value with high returns. Our return on invested capital has always been high, it's even higher today, as we've reshaped our portfolio, invested more in emerging market opportunities and refranchised in places like the U.K., and the United States where we've taken our ownership down. This has led to very, very high returns on invested capital.

Now, what I want to do is just kind of wrap my section up with how I talk to people who potentially might be able to join our company. We are constantly trying to bring in new talent. And we're constantly working on creating a culture that keeps the talent that we have. So when somebody comes into my office, they've usually been to one of -- they might have been to our BMU in France. Then they've gone to Dallas and met with Mickey and the team at YRI, and then they come meet me. And so I get the opportunity to sort of -- if it's somebody at a fairly high level in the company, a director above, I make sure that there's a stamp of approval across the board on this person because we're going to invest in them long term. So what you don't see is you don't get to see what I tell him. What I tell him is listen, if you come to this company, you're going to help us build the defining global company that feeds the world. Now why do I tell them that? Well, whatever -- if anybody should define what a tremendous multinational company ought to be like, it ought to be us. 117 countries, 1.4 million people around the world, brands that are in the vernacular, brands that are part of life everywhere we go. Brands that brings smiles to people's faces. So if there's one entity that could define how you truly build a great global company, it ought to be us. And I think people find that very compelling, because people don't really want to go to work every day to be a part of something mediocre. People want to go be a part of something great. And if you join Yum! Brands, you can help us in our quest to do something great and really make a difference in the world in terms of how a company ought to act and perform. So we start there.

Then I say okay. Now, it's nice when you come into the company that you can grow. Most people like to make money, believe it or not. And one of the things that we've done over the last 10 years is that, with our stock programs, we have appreciated tremendously over the years. So we have a great track record of being able to drive growth and people like to be part of growth because you're winning and people also like to grow their net worth, which you can do at Yum! Brands. And then all of that is yesterday's newspaper. To join Yum! Brands, you're here to keep it going. And the good news is, is you're going to see from these presentations today that we are on the ground floor in terms of new units, we're in the ground floor in terms of same-store sales growth opportunities and we have -- already have the high returns.

And internally what I always talk about, what are the 3 things that drive shareholder value, based on a study McKinsey did with 500 retailers: New unit development, same-store sales growth and high returns. We're on the ground floor in terms of that. So you can help us do that and be a part of a great culture, where we have a lot of fun recognizing and celebrating the achievements of others. I've talked to you about how we cascaded achieving breakthrough results training all around the world. If you go to any one of our restaurants support centers and most of our restaurants now and you ask a restaurant manager or somebody in restaurant support center, "Have you gone through achieving breakthrough results training?" Almost everybody raises their hand. This was the single largest global cascade of a cultural initiative I think that any company has ever done. And we're continuing to take those kind of efforts to the next level. But people have a lot of fun in our company. And there's a lot of energy in our company, and most companies, most corporations are boring. So you can be in a company that grows, and you can have some fun. Okay?

And then the third thing that I've learned is that people want to be a part of a company that's responsible and doing things good in the world besides just making money. And we say that we make a difference in the world on 2 fronts. Number 1, through the jobs that we create. We have a huge heart just through the jobs that we create. This picture on the left, we have 12 KFCs in India that are run by specially-abled people. They're all hearing-impaired. I went to one in Bangalore where it's ranked in the top 5 in operational metrics. Our customers love it. They see the passion. They see -- and our people love it. They see the commitment that we have to people. And I did a round table, I obviously had a sign language interpreter with me and I asked these kids, I said, what's the single biggest thing that you'd like to ask me? And it was like, how do we get promoted? And you know what? Our India team is working on a management development program for these people, because they're so passionate. It's like volunteer work. We have trainers working in their spare time, literally putting together the training program where we could ultimately have a hearing-impaired person run a restaurant. And it's going to happen because we believe in it, and this company has a huge heart.

The other thing that we've done is we've partnered with the World Food Programme. And we have build awareness of the hunger issue around the world and literally we've donated over -- almost 500 million meals since we embarked on this program the last 5 years ago. So that's what we tell people, and then I also tell them, these are 3 reasons why you shouldn't join us, okay. Number 1, if you can't get along with all people, all levels, and you can't go in and put your arm around a team member, don't come. Number 2, if you've been getting feedback from your supervisor that you don't have a high sense of urgency and you're not -- you don't get as much results, don't come. And number 3, if you're at a high level in the company, but you can't think conceptually and you don't have a right brain to really visualize what a business can be, don't come, because we'll figure it out and you won't be here, because we manage out the bottom 10%, too.

And I think what typically happens is when people get that story and they met all our people, they want to come. And what's happened is we really muscle-built our organization. We are bringing in talent like you can't believe. Our hit rate on getting great talent in the jobs that are available is amazing. In the last 3 years, we brought in people from these -- companies like these. We've recruited the top R&D guy from PepsiCo. He runs our India business. I could go on and on, but we got great examples of phenomenal people we recruited, but that's one thing. The thing that I would say, the biggest accomplishment we have is we keep the stars that we have. And that's what a great culture does. It helps you recruit and bring in great talent. But more importantly, you keep the stars that you have. And you're going to see a lot of them on stage today.

The first person you're going to see is Rick Carucci, who's been our CFO for quite a while. He's been in the food business for 17 years. He knows our business cul and he’s a great partner of mine; absolutely fantastic partner. Then you're going to meet Niren Chaudhary, okay. We just separated out the Indian business because we have a tremendous management team. Our management team in India is fantastic. Those of you who have been impressed with what's going on in China, when you go to India, you're going to see an A-team there, and this is a self-sufficient team that's going to take that business to a whole different level. You might have read where Graham Allen recently made the decision to retire as CEO of Yum! Restaurants International, I'm delighted that Micky Pant is taking that job over, and Micky's been with us the last 7 years. He's our top global conceptual brand builder and thinker. And he's also been running half of the country as Graham's partner -- half of the world as Graham's partner in the last 4 years. So he has tremendous experience, and he's going to bring a lot to the party in terms of driving even more growth as we go ahead.

And then you're going to hear from Ivan Schofield, who now has Western Europe. He's built our France business. He started out as the CFO in the U.K. He's been in France for 9 years. He is creative. He's setting the aspirational target for what KFC can be. And then you're going to hear from Martin Shuker, who's been with us for I think around 15 years. He's our GM from the U.K. And I don't think we've had anybody who's done a better job of driving performance in a tough market than Martin. But all of these people, all these leaders that you see are just absolutely fantastic.

And beyond that, you're going to see what I think is one of the greatest evidence of any kind of leadership, is somebody who can build a great leadership team. And Sam Su is our Chairman and CEO of China. And today, we have 3 of his top leaders presenting the China story. Mark Chu is the President of China, our #1 operator in the system. 14 years ago, couldn't speak English. Now he speaks English. He can actually tell jokes in English. They're not very good, but he can tell them, okay? But he's fantastic, okay? And then Angela Loh, probably our best marketer that we have in the world, and she has done such a fantastic job building with -- along with the team, the brands that we're doing there. And she personally has given special attention to East Dawning in addition to her total marketing responsibilities. But I'm absolutely convinced with her leadership that great things are ahead.

And then we have Lily Hsieh, who is our fantastic CFO. She basically has done a great job for us in many different functions, including being Chief People Officer, Supply Chain Management. All of these Chinese leaders have been with us for over 15 years. So I'm really proud that this team that you're going to see today is -- they've been with us for years, they're committed to the company and they're passionate and they are building people like you can't believe. And so what I hope I give you a sense of is that people capability to us is like -- it is job #1, and we are building that every which way you can. Second thing I want you to know is we're raising our standards and the bar on our performance in practically everything that we do. We're not satisfied. I mean we might have had some growth, but this is a team that's hungry and we want to keep winning and we know what we've done in the past is yesterday's newspaper. So we really believe, and our job is to really acknowledge the fact that, hey, we're on the ground floor of global growth. There's -- it's in China and a whole lot more. And the best is yet to come. And our job is to go after that unfinished business. So I hope I've given you a sense of what I see, some of the things that I do that kind of brings the strategies that we have to life and put a little different perspective on it.

So with that, I'd like to introduce the Italian stallion CFO of Yum! Brands, Rick Carucci.

Richard T. Carucci

That was a pretty amazing presentation. Thank you, David, and good morning, everybody. I really appreciate being able to tell the Yum! story to investors. One of the things that we're going to do this year is we're actually going to try to widen the group. So we're used to telling our story to people like you. But we think we can go more mainstream in telling that story. And for those of you who haven't seen us before, this is meant to be the almost humorous part of the presentation so as you know as...


That is probably enough for some of you. I feel very good about the company, David talked about it before, but I feel that our business model has never been stronger. I'm going to share with you the business model today, and I'm also going to then give some headlines into 2012. As you think about our business model, there's sort of 2 things I'd like you to take away. I think one is that we have an evolving business model and that we have an enduring business model. And it's evolving in that we continue to penetrate emerging markets and it's evolving in where we think our competitive advantage is strengthened, and I'm going to take you through that today. And it's enduring because we think we have great visibility of growth not just in the next 5 years, not just in the next 10 years, but even further down the road and I'm going to share that with you.

A lot of you know us pretty well. We have a pretty complex business model; David talked a little about it. We have a lot of restaurants in a lot of countries. We run multiple brands, 3 large ones today. And because of that, we've gone with the versatile ownership structure. And we have mostly franchisees, and franchisees are great because they help us manage that complexity because they have local expertise and their own equity into managing most of our businesses around the world. But importantly, we have company ownership as well. And we think the combination of company and franchise ownership is the right way to develop a global business. We're getting 2 goals done. One is we want to be an aggressive growth business; and secondly, we want to do it in a shareholder-friendly way. And we think that the versatility of ownership allows us to do that. And increasingly, our model's becoming more and more skewed to emerging markets. It's 11,000 units and counting today.

We've become a much [indiscernible] in over the years. We have [indiscernible]. We have -- when we first spun off, about half -- about -- let me try this again. Can you hear me now? I'm going to go with the other -- I'm sorry. When we were spun off, I would describe our business as a mostly U.S. business with a large international component to it. And as we become -- over the years, we've become a lot more global. And as recently as 5 years ago, less than half of our profits were outside the U.S. We have help.

[Technical Difficulty]

Richard T. Carucci

Can you hear me now? No. [indiscernible]. My apologies. [indiscernible]. My apologies. As little as 5 years ago, less than half of our profits were outside the U.S. and now it's 75%. And while some of that is because we didn't really grow our U.S. business, most of it is because of our large growth outside the U.S. When we were spun off, less than -- we were making less than $200 million out of YRI and China combined. At that point, it was one division. And we were pretty proud in 2006 when that became about $700 million. Well, we'll close 2011 with well over $1.5 billion in profitability out of YRI and China. So that's impressive growth. As I've said before, a lot of that is coming from emerging markets, and emerging markets is, again as little as 5 years ago, was only 30% of our profitability and it's now gotten to the point where we've almost doubled that to 58% of our profitability. And you'll see that, that will grow over time.

Now most of this growth in emerging markets is really because of the growth in China, but you'll see it's in a lot of other parts of the world as well. But it's also because we've scaled back in some of our developed markets. We believe in an earn-the-right-to-own philosophy. And what that means is you have to sometimes make hard decisions and refranchise restaurants if we think it's in the right thing for our shareholder. And you have to have discipline as an organization to do that, because it's very rare. In my experience, it's very rare that a general manager of one of our businesses says, "Please, I think you should refranchise my business." And we probably don't want general managers who feel that way. But the reality is that we have to do what we think is the right decision for our shareholder and we said before, we're going to take KFC ownership down from 10%, which is at the end of this year to 5%. So we made a lot of progress this year. That number used to be 20% ownership. Greg Creed is going to tell you later today, when he takes you through the Taco Bell story, that our Taco Bell ownership which is end of the year at about 23%, we're going to take down to 16%. And we previously announced our intention to refranchise the Pizza Hut U.K. business. Later on, Martin will talk about the KFC business there which is going gangbusters.

But what that does is has a tremendous shift over time of where we have company-owned restaurants. So this chart shows what our company-owned restaurants were in 2001, 2011 and what we forecast in 2014. And 10 years ago, the little red bar we had less than 1,000 -- we had about 1,000 company-owned units in emerging markets, and we had over 5,000 in developed markets. And now, that is sort of 50-50. And you'll see after we do the refranchising that it really swings even further. So again, a lot of that was the growth of developed markets but even just between 2011 and 2014, we're assuming refranchising 1,000 restaurants from that other business. So you can see we've also taken down the ownership in developed markets.

Now what I'd like to do now is talk about our brands a little bit but also, mentioned at the beginning, is talk a little bit about what our competitive situation is there. And the first thing is KFC is a great global brand. But I'd also like to the point out what this chart shows is Pizza Hut, we think now is 2 brands under one name. We worked really hard; you've heard us over the years separating the Pizza Hut brand between dine-in and delivery. And we think we're most of the way there now. So we have a Pizza Hut casual dining brand; I'm going to talk about the competitive nature of that business, and we have a Pizza Hut delivery brand.

Now we've said before, and Graham Allan as Head of YRI had talked at previous meetings about the competitive level is different internationally than it is in the U.S. And what I'm going to try to do now is take you through a flavor for why we believe that. And what we're going to do is we're going to show it based on use because this is where we have the counts available. So first is Pizza Hut. And the reality is the global brands that exist, there are very few of them, first of all and secondly, they all have U.S. origins. So if you look at casual dining, you could see that there are some significant players there, but nobody really has anywhere near the scale that we have. So now that Pizza Hut dine-in brand -- we're clearly positioning it as casual dining, pizza and more. We look at the competitive landscape there as a landscape in which we control our own destiny. So we're the leader now, and if we get -- if we do our job right, we think we have a very good runway there.

The delivery business is more competitive, you could actually see that Domino's is a leader in delivery the outside of the U.S. But now that we've separated the brands, we're really ramping up growth in our delivery business. This year we're going to add 200 new units outside the U.S., and we're poised to increase that. And I think it's -- it won't be long before we're the leader-developer outside the U.S. in delivery, and I think that'll be as early -- that could be as early as next year. Perhaps the most interesting piece looking at the share, though, is in the quick service industry. And if you look at that -- first of all, this just shows -- this shows U.S. to international. In the U.S., if you take the 10 largest QSR brands and add up their units, McDonald's and KFC combined make up 38% of those units. If you look at that internationally and add up again those 10 leading U.S. brands, you transpose the numbers, then 38% just becomes 83%. So in the international world, it's really a 2-person game with McDonald's and KFC right now.

Now if you go further and look at the top 10 emerging markets and you do the unit counts, you could see it's even more of a 2-person game. So there's 2 things I'd like you to take from this last pie chart. One is look at how small the all other are. So if you look at the U.S. business, I mentioned those top 10 players. The other 8 players have 30,000 units in the U.S. and by the way, KFC in the U.S. has about 5,000 units. If you look at just the top 10 emerging markets -- KFC by the way still has about 5,000 units in the top 10 but instead of those all others, about 30,000 in the U.S., they have 400 in the top 10 emerging markets. So one thing to keep in mind, we don't think anyone besides McDonald's or KFC are going to be a significant player in this category for a long time. David mentioned it takes a long time to establish brands in countries. In a lot of the countries, there's actually nobody there besides KFC or McDonald's.

And the other thing is you can see we have the bigger part of the pie chart right now. So this is 2010 numbers, we're about 59%. By now we're over 60%. So we have a 60% share of units in those markets. And I think if you could take this into account as well, we're continuing -- we've mentioned this before, we're the fastest grower in emerging markets. I think if you look at that pie chart on the previous page, there's 2 points to make. One is that our share of the pie will continue to grow. I'm fairly confident of that. And second is I'm even more confident that the pie will grow. And we're going to take you through why we believe the pie will grow.

So having an increasing share in a growing category, I believe, is a really nice place to be. In terms of why the pie will grow, we've talked about these types of numbers before but these are updated. You look at the population and the number of Yum! units that we have, and you do some math and look at the units per million. Right now, we're at 1.7 restaurants per million people in the top 10 populations around the world. And again, our U.S. benchmark is about 60%. So that's just a huge opportunity. We're not saying we could hit 60%, but we don't have to get anywhere near 60% to have a huge business for a while. So there's a great runway, even 10 years from now. And to try to give perspective, we -- before we try to show some perspective of what this business could be like in the future, what we're going to do is look backwards as well. So what this chart represents is the number of units that Yum! has in those top 10 markets, and it shows what we had 10 years ago in 2001. And you could see we made a lot of progress already. We've added about 5,000 units over the last 10 years in those markets and in a lot of these places we've been accelerating the growth. So if we look at what we could be in 2020, we could see ourselves having 15,000 units in those markets and then adding about another 8,000. But the point that I think is important is even -- whether that number is exactly 15,000 or something different, I think 2 things are evident. One is that we're really going to have growth in those markets over the next 9 years to get to 2020. The other is once we get to 2020, we're still only going to have about 4 restaurants per million people. So the potential even in 2020 is really large. David, when he summarized, also talked about we're on the ground floor into what we could grow existing restaurants. And our role model for the people who have done the best job at sales layers and that's how we plan to grow our business, is through increasing sales layers, has been -- our China business, both KFC and Pizza Hut and McDonald's business in Western Europe and the U.S., we think they've done a great job of developing sales layers and this is what we've been working on hard the last 3 years. But no one does it better than our system in China. In China when you're looking at beverage, 24-hour breakfast delivery and they deliver both KFC and Pizza Hut, they're doing $1.7 million per restaurant. And Yum! right now only averages about $1.1 million. So clearly, as we add layers we think there's opportunities for us. And the way we're translating that is different. In emerging markets, what we're doing is we're going much earlier in the cycle and try to establishing these sales layers. So when Niren talks about India later, he's going to be talking about trying to establish sales layers pretty early in the development cycle of India. Similarly, we know that this is what it's going to take to grow our developed markets. So you're going to hear Ivan talking about France and Mark Chu to talking about the U.K. We're starting to get traction in getting sales layers into our developed markets and that will give us important growth in those businesses for a period of time.

So if we look at where we're going to source our growth, as we sort of said, we think it's China and a whole lot more. China is obviously critical for us and will remain critical and we're going to make almost $900 million in China this year, so we need to continue to grow that business. I think you're going to be hearing later today that we're in very good position to do that, but China's going to be important now and in the future. However as you get to 2020, they're going to have a lot of help. India, I always look at, you're in a separate category in India when you have a population that begins with a B. And with a very young population that's over 1 billion people, we actually are not relying on India for growth in the next couple of years. We'll talk a little bit about that in the modeling session. But starting in the middle of the decade forward, India will be important. When we get to 2020, we think it'll be a significant increase in our profitability beyond that period of time.

Now David mentioned a little bit France, Germany and Russia and what big businesses McDonald's has there. If you add those businesses up, we think McDonald's makes about $1.5 billion and we make $40 million. So that's one way to think of it. In fact, if you want to dimensionalize it in another way, if you throw India in there, India, France, Germany, Russia combined, we only make $40 million today. And I'll be shocked if in 2020 we're not making hundreds of millions of dollars in those places combined. In fact, I think there's a good case that we'll be making over $100 million in each of those countries in 2020. And we have a place like Africa, where we're really just getting started outside of South Africa and Egypt and these other places of Africa. And again, we're not relying on that business to have a significant increase in our profitability really for the rest of this decade. But we think that could also help us get growth. So while China's carrying a lot of the freight today, we think we have a lot of help coming down the road. And that's really pretty much with our KFC and Pizza Hut brands that we have.

When you look at other brands that we're trying to develop, Angela is going to talk a little bit about East Dawning in China. And again, that's not going to be a big part of our growth until the latter part of this decade. We have Taco Bell International which we're just getting started. And we've added 10 new countries over the last several years. But again, we're not relying on that until 2020 and beyond. And it would be nice if one of those 2 brands were to pop, but quite frankly we don't need them. Similarly, we're not going to talk about Little Sheep today. We hope at some point that could become a part of our portfolio. But that being a public company, we're just not going to comment as we go through the approval processes.

But what does that mean for our growth model? And this is our growth model today, and you guys have seen this before. Last year, we had 15% profit growth in China, 10% YRI and 5% U.S. If you add that, gets you to over 11% EPS growth. You throw in a couple of points from the impact of share buybacks and you get to about a model that yields about 13% growth, and we sort of model that out that we -- we know stuff happens in a given year, but that's why we've been able to achieve at least an annual growth of 10%. And we think we're well positioned to do that for the next several years.

But one of the things that, going through the charts I just showed you through, is we think we have high visibility into what our growth rate could be down the road. And so this is one scenario -- this is what that same chart which looked as our ongoing earnings model, what we think it could look like in 2020. And we think at that point in time, China will be 5% to 6%, India will give 1% to 2% EPS growth. And we think the rest of the model will actually be intact as well. And that's unusual I think for a CFO to sort of show out what we think a growth model will look like almost a decade from now. But retail takes a while to get the flywheel moving, and I think you'll be hearing today that we're starting to get the flywheel moving in different places around the globe and that gives us the confidence to project out what we think our growth rate will be. Because what -- I get sort of 2 questions, someone the other day, I get 2 common questions. What do investors miss when they're looking at Yum! stock? And I think the first piece is our people capability around the globe. David tried to give you a picture of that in his presentation. I think it's really hard to see that unless you could travel extensively around the world. And the second thing that I tell the people they miss is I don't think they're running their models long enough for us, especially in our international business. Because as we said before, we have that long runway for growth and I'll be very surprised if we're not a double-digit growth business in 2020 and beyond. And I don't think everybody runs their models that way.

And while we can't guarantee results, one thing I am confident about is the way we're going to approach the business. And I think that there's 2 traits that you'll see us demonstrate, and that's on the left side of the page, is we will remain growth-oriented and we'll do it with discipline. So don't get me wrong, we want both and we think we can do both. So we will -- we want to take advantage of these opportunities in emerging markets and our developed markets as well. We're going to continue to do that in a disciplined way, both in terms of ownership, company versus franchise, in terms of capital and how we allocate that and also in terms of making sure we don't move faster than our people capability, which is why the people side is so important to us. When we do that, we know we already get higher returns and we're fortunate that we think that we're going to great returns in where the growth is, and we do it in a way that's going to increase shareholder value. We -- I know a lot of companies say they're shareholder-value friendly. I can tell you, Tim's trained us over the years, we always have the shareholder in the room when we're making decisions.

What I'm going to do now is shift gears and talk about 2012. And as a backdrop, I just -- one slide to talk about 2011. And obviously, China had an amazing year. It's so unusual to have both record new unit growth of 600 units and the huge same-store sales that we've had this year. YRI had a good overall year, but it was really very strong progress in our progress in the strategic markets and you're going to hear from some of those today. In the U.S., frankly, we had a disappointing year. And I'd like to believe, like David, as you think about the unity of purpose of KFC, the unit growth that we have at Pizza Hut and you're going to hear later from Greg, I think exciting plans for Taco Bell. I'd like to believe that we'll have a strong 2012 overlapping this year.

As you look at headwinds and tailwinds that we tried to publish on Monday, want to speak a little bit on those. First of all, we probably expect -- we still expect sluggish macros in developed markets for at least the first part of 2012. We'll see how things develop beyond that. We have the 53rd week in 2011. Now that is only a modest, a small headwind in -- for 2012 because we had a lot of -- we had a fair amount of investment spending this year, and we had higher than normal expenses in things like closure, et cetera. So we think it's only a minor headwind for the full year, but it will be a material headwind in the fourth quarter, especially the fourth quarter in the U.S. And the other thing that, and we're fortunate we have a frozen pension plan, but even with the frozen pension plan with the expected reduction in our discount rate on pensions, we expect the $30 million higher expenses roughly in 2012 versus 2011.

On the other side, we have tailwinds. And one of the tailwinds we always have which is one of the benefits of having a lot of your growth on new units is the new units are already in the ground, plus we think we have a strong pipeline for 2012. So we expect a strong year of development in 2012. The other piece that we have and this will help offset the pension and the overlap is as we've done the refranchising I talked about earlier, we've identified about $30 million of benefit of G&A associated with refranchising. And that'll help our results in 2012.

The other one is a hard one to call globally, but we're pretty sure we're going to have upsides in China. We've talked about having ForEx benefits; right now, we're estimating around $30 million. That's a positive $40 million in China and a negative $10 million in YRI. Quite confident China will be material, be at least $20 million but probably closer to the $40 million. And I think the international is just very hard to call. There's a lot of volatility in exchange rates right now. So I'll be surprised if that one doesn't move during the course of the year.

China is such an important part of the business, so I wanted to give you a little bit of the view of what we expect in China. Obviously, we had margin challenges in the second half of 2011. And that was really because pricing trailed inflation. We expect that to continue at least through the first quarter next year because we still expect higher commodities in the first quarter. We do expect commodities to slow down in terms of their inflation in the latter part of the year. So right now, our inflation assumption for China is about 6% for commodities for the full year and about mid-teens for labor. So if you do some quick math on that, plus the sales is about 35% of our revenues, so if you put a 6% growth on that -- 6% inflation on that, you need about 2 points of pricing to offset that. And then if you take mid-teen inflation on top of cost of labor which is also about 15%, you need about 2.25 points of pricing just to offset those inflations. So you need 4.25 points of pricing just to offset inflation next year.

We took pricing, this year, we took about 3% end of January and we took 4% in the fourth quarter. So obviously we'll monitor commodity inflation and labor inflation as we make our pricing plans for next year. But if I had to make our best guess today, we'll probably have a modest price increase in the first half of the year and then we'll read inflation and decide what to do thereafter.

The one thing we are -- we have confidence of is that we will positively overlap the second half margins that we had this year. On the sales side, I think it's a tough call. I think on the one hand, you can never -- we have great momentum coming into the year. You've seen the results this year. And it's very unusual that you can have such strong same-store sales on top of the unit growth that we're talking about. Having said that, it's always -- I think CFOs always tell you, you're always worried overlapping those types of sales numbers. But I really think it's a tough call. One thing I do want to remind people, though, is our business model does not require double-digit same-store sales. I get so many good questions, "Will double-digit same-store sales continue in China?" And I say, I'd love it to happen, we don't need it to happen. So clearly, we think we could continue the type of growth that we've had with unit developing contributing as much as same-store sales actually as more so.

Going into the year, though, I always like our chances in China and I really do it for a couple of reasons. One, we have a great management team. And David talked to a little bit about that at the ops level. You're going to be seeing some of those leaders today. And we have a very strong competitive position. So I've always said this before, I do not fear an environment with high inflation and high growth because I think we have a team and a business that's better equipped to deal with inflation given a national footprint and day parts and menu variety, et cetera. And our competitive position, especially when you talk about the lower-tiered cities, has never been stronger. We're adding a lot of units there and there's really nobody else playing in that environment. So I like our chances of continuing our record of double-digit EPS growth in 2012 and beyond. And we're going to do it in a shareholder friendly way. We're going to build new units throughout the world, but especially in emerging markets and under-penetrated markets in YRI. We're going to grow same-store sales through new sales layers and product innovation, and we're going to do it while having high returns and adding shareholder value. So I appreciate your time for this presentation. What we're going to do is we're going to have a short break and then after the break, the China team is going to talk about how they build brands in China and how they are able to manage the impressive growth in that country. So thank you.


Tim Jerzyk

All right, if we can get going, we want -- we'd like to get going on the China section. We have 3 presenters. And after those presenters, we'll definitely go to Q&A for China.

Mark Chu

Good morning, everyone. I'm Mark Chu for Yum! China. I've been with Yum! China 17 years. And it's my pleasure to come to New York again to update you, the Yum! China and its future. And I know many of you have a keen interest in numbers and such as how many stores we are going to open this year. And -- or what percentage of our breakfast sales. Maybe leave that interesting part for Angela Loh, is our Chief Marketing Officer; and Lily Hsieh, and our CFO. And my focus will be softer topic including people capability through that you can feel the relationship a bit more. Just make sure I won't mis-deliver all my points. I need to bring up my focus.

When you really think about the people capability, all the numbers and figures are a direct result of a very capable people we have running our 4,000 more restaurants. Running the restaurants day-in and day-out, often both day and night, around the clock. So I want to take a few minutes to explain how people capability is a strategic advantage for Yum! China, and how it is the key foundation for the ground floor opportunity in China.

Many, many years ago when we start up the Yum! China, our future back vision was simple and clear, yet bold: To build a better restaurant company not just in China, but in the world. Back then, we realized we needed to invest in the best of quality people from the beginning. So we used the strong brands to attract quality people and get them clear career path. With a clear vision to be the best and biggest leader in the restaurant industry, we decided to make every store a training store. We knew we needed a platform to build strong brands to meet a variety of our customer needs. Therefore, we have worked on a world-class restaurant excellence system which I will explain further.

Last but not least, our field management structure is aligned to work RGM #1, around growing the brands all across China, all across 700 more cities. There are numbers of examples in Yum! China of our people development track record. In fact, I'm one of a real example. I began my career working as an RGM and my career progress took off from there. And I'm proud to tell you, each and every one of our market managers started in our restaurants and grew up within our company. Today, they are general managers of a scale business with several hundred units and hundreds of millions of dollars in revenue. Let me explain further how we approach building people capability. We start with the branded recruitment. With our stronghold brands to attract quality people, we also give our new hires a clear picture of a career path as our business grow bigger and bigger. We recognized from the start that a high-quality people was absolutely fundamental to our long-term success. So from our earliest day in China, we targeted college graduates who we saw can bring the quality of leaders we knew we would need for growing business. Today, over 90% of all our RGMs are college graduated. And more than 50% of our team members are students.

Each of our store is a training store. Well, we continue the -- do the bench planning for the needs for new stores. Actually to be frank, when you follow this formula, it is not hard each year to add 600 more new units and the quality people who will run them. Let me share a story. Years ago, when we had about 1,500 units, our CEO, David Novak, asked me how many new units we can start and support for annual development. My answer back then was 600 new units. Because each of our 1,500 units can train and grow 2 to 3 management staff at least a year, giving us a bench of 3,000 to 4,000, with each unit taking about 5 to 6 management staff. That means we had talent for such growth then. With over 4,000 units today, imagine how much growth our people development engine can support.

To go with the strong people, our world-class system we have built in China, this system are behind all we do in delivering true restaurants excellence. The list is long and detailed. Just to name a few, clear operating standards, execution tool, coaching and evaluation, all the details. It is not rocket science. It is the detail and strong discipline. It is a sustaining persistence to satisfy each consumer. I want -- what I want to make clear is that is not just a system for KFC main meal business, but a system adapted to a wide variety of brands and business models. Different day parts like breakfast, late night, during 24 hours and different service models, delivery for self-service, casual dining. These systems are the backbone to give us a strong competitive advantage, how we can run more and more concepts. It is truly a business that works around the clock.

Just one example of this coming to light in China is Pizza Hut, the leading casual dining brand in China. Those of you who are familiar with the Pizza Hut in China knows it is a full casual dining concept. It is a direct outcome of building strong restaurant for excellence system for high-quality people. It is also the reason the Pizza Hut line can deliver the 3 consecutive years' 2-digit growth in same-store sales.

We are often asked how we can take our brands to so many cities. For one, we run our own national distribution system, a world-class operation that is behind the restaurant. As for how we do it in restaurants, let me explain, we have a built-in operation structure and culture that is centered on RGM is #1. In over 60 markets, across all of China, we are organized to coach and support each and every RGM. It is the same approach for Tier 5 cities as is for a Tier 1 city. That means our RGM is set up for success. And it's why we are able to uniquely provide the same great experience to customers in cities, large and small. Today, we have penetrated over 7 more cities -- 700 and more cities. Yet we know we are on the ground floor to go to many, many more cities.

The outcome of all I have shared today is the strong team of restaurant leaders we are building all across China. Leaders of Western QSR, casual dining, delivery and Chinese fast food. Just several weeks ago in southern China, we held our annual RGM convention. The managers from and each and every KFC, Pizza Hut Dining, Pizza Hut Home Service and East Dawning come together in one place. At the meeting, I proudly talked before over 4,000 RGMs. How important their passion has been to growing Yum! China. How our early vision of building the best of restaurant company in the world started with the people just like them. And how this people capability is truly a strategical advantage we have developed in China that will endure for years and years to come. As we led a Yum! cheer with all of them, I had the privilege to witness probably breaking the record for the largest and loudest Yum! cheer in Yum! China history. This is the key how we can continue to deliver year-over-year record high performance. Thank you. Now I will hand it over to Angela, our Chief Marketing Officer of Yum! China.

Angela Loh

Good morning, my name is Angela Loh. I've been with the Yum! China team for 18 years. I started as the KFC Marketing Director and coming from a restaurant operation background. And now I'm the Chief Marketing Officer and responsible for all brands in China. It's my pleasure to be here to share with you our brand-building strategies in China. As one of Yum!'s important global strategies, we need to build leading brands in every significant category. As of today, KFC and Pizza Hut Dining are the leading brands in Western QSR and casual dining categories. We also have 2 relatively small, small brands but have huge long-term potentials. They are Pizza Hut Home Service and East Dawning.

Let me share with you how we build strong brands in their respective categories. If I need to summarize, there are some critical brand-building strategies that support our current success in China. They are menu localization, targeted strategies for different age groups, a system model which support all day parts, never-ending innovation pipelines and last but not the least, our world-class development and operation capability as the backbone of our encouraging growth results. These strategies have proven successful across different restaurant categories. Now I will spend a few minutes to take you through how we apply these strategies to different brands.

Let me first start with our biggest brand, KFC. In order to achieve high use frequency, we believe protein variety is critical. We are definitely the chicken expert, but we are not chicken-only. We continue to deliver tasty non-chicken products, including shrimp snacks, fish fingers and beef racks to satisfy consumers' needs for protein variety. In addition to protein variety, we also offer taste variety to our consumer, especially their favorite Chinese taste. Just to name a few: roasted chicken sandwich, Peking duck flavored twister, Si Chuan chicken strip rice meal are all very popular on our menu now.

Though we have a great menu, we know that just menu variety alone is not enough. We need to make the brand to be relevant to all age group. With that in mind, we have designed specific marketing initiatives for different age groups. For example, we have value breakfast and weekday lunch offers for young adults. And for teenagers, we offer their preferred drinks and snack choices. Besides food, we also have the largest teenager 3-on-3 basketball program in China. There are more than 180,000 participants this year. A few years back, we were behind our competitors in terms of teens appeal. With our product and sports initiatives, we are making great progress and make our KFC brand more popular among teens. Kids are also very important for our current and future business, so we also have tailored kid's meal and marketing programs for kids and families.

As a result of our targeted marketing initiatives, our KFC brands have a very well distributed consumer profile. We are the preferred brand for all age group in China. In order to fully leverage our assets, labor investments and to maximize our sales opportunities, the KFC business need to work around the clock. Since we launched the breakfast 8 years ago, this business day part continued to develop -- to deliver very high sales growth. And now it's a critical part of our business models.

Our breakfast day part is supported by a very different menu, which include a lot of Chinese favorites like congee, Chinese fried dough and soybean milk. And this menu gives a consumer a reason to visit KFC more than one times a day if they wish to.

Today, with the fast-changing consumer and lifestyle, 24 hours operation is the new business opportunity for us, and we tailor our menu offering in the day part to maximize operation efficiencies. We are gradually rolling out the 24 hours operation to ready cities. With those said, we are confident that KFC is a brand with strong shoulders that can stretch the wide variety, serving customer at all ages, 24 hours a day, 7 days a week. We have average volume sales of $1.7 million. This is a big brand called KFC, not just Kentucky Fried Chicken.

Let's now turn to Pizza Hut casual dining concept. We have probably the same brand building strategies on menu varieties. We are a pizza expert, but we are not pizza only. Rice, pasta, grilled proteins all play a very important role on our menu. In order to give consumer a complete Western casual dining experience, we also offer a wide variety of appetizers, salads, soups, drinks and dessert to make consumers' meal complete. It's difficult for people to imagine our menus but I believe, for some of you who had visited our Pizza Hut China restaurant before, you would agree that we have a very tasty and exciting menu.

Again, we have targeted marketing initiatives for different target customers at Pizza Hut. We offer weekday business lunch at a very affordable price to young adults. In the teen segment as a whole, our strategy aims to college students who have more spending powers. College ID, discount programs, campus online programs are just few of the popular college student program we have in place now. Kids are also very important at Pizza Hut. For kids at Pizza Hut, they get to make their own pizza in the birthday party program, which is the total experience that they will get at a KFC birthday party program. Just like KFC, Pizza Hut dine-in brands is able to satisfy our consumer across many different age groups.

Since we have beautiful assets and caring table service, Pizza Hut dine-in has already successfully tackled afternoon and after-dinner day parts with our exciting pizza menus. Our free drink refills offer also become part of our signature service and give consumer a great reason to enjoy a break at Pizza Hut, not just for the busy meal time. With the know-how we have such as on KFC, we will continue to explore other new business opportunities and to maximize our dining business potential. We are confident that we are -- we will continue to stretch the Pizza Hut dine-in business beyond the annual unit volume sales of $1.6 million.

Now let me turn to Pizza Hut Home Service, a business with huge long-term potentials. Our goal is to build leading delivery brand, not just a Pizza Hut pizza delivery brand. In the last 2 years, we have broadened our menu including more rice and noodles products with Asian and Chinese flavors. Again, this is another successful applying menu localization and innovation. With this meaningful categories, we are able to achieve double-digit sales growth consistently. Consumers really appreciate the product varieties and value we are offering to them. We are definitely at the ground floor of our delivery business.

Let's switch channel to our youngest brand, East Dawning. We have developed this brand because we would like to capture the biggest consumer demand in the QSR category, which is Chinese fast food. East Dawning has all the great standards that KFC offers while serving consumers their favorite Chinese food. East Dawning's breakfast effort, value program and teatime offer all have proven successful in the last 2 years. Current East Dawning transactions per unit are approaching KFC's numbers and we had the highest unit volume in the Chinese QSR category. We will continue to build this brand with great discipline.

Last but not the least, our strong innovation capability is behind our powerhouse brand. Every year, we have 20 to 40 new products for each of our brands. We have a very disciplined process to ensure all our new products are supported by strong consumer insights and we are able to generate great sales returns and consumer satisfaction. For 2012, we also had very exciting pipeline ready to be rolled out.

In summary, we believe strong brands need to be built based on clear and relevant brand positioning and strategy well followed. In order to maximize their business potential, KFC will be around the clock beyond chicken, Pizza Hut dine-in will be the complete Western casual dining experience. Our delivery business will be beyond pizza, and East Dawning will be the best Chinese QSR option at KFC standard. We are confident with our raw positioning our brand can be the leading brand in their respective categories, thus delivering the Yum! strategy to have multiple leading brands in China.

As I have mentioned earlier, I have been with the Yum! China team for more than 18 years. I joined the Yum! China team when we had only 7 KFC's. Now we have 4 great brands and we are able to attract a lot of great marketing talent from the market. We have more than 100 marketing team members working on the 4 great brands right now. And I have to say, I'm very proud to be part of the brand building and talent development process.

Thank you. Now I'd like to invite Lily Hsieh, our CFO to the stage to share with you how we build the brand in the future.

Lily Hsieh

Thank you, Angela. I'm Lily, CFO for China Division. I've been with the company for 15 years. In fact, I'm the most junior member in tenure among the speakers seen here. Today it is my pleasure to share with you the bright development future for China. And I'm sure you know that China has experienced tremendous growth, particularly in the past decade since the ascension to -- into the WTO.

Now for the next stage, I'd like to suggest to you that there's still significant growth to come and this is going to be driven by the largest urbanization movement in the human history in the next while. And such driving income level rise, as well as the tremendous growth in terms of consumption power. Yum! Brands in China has a number of leading brands, and these are well-positioned, appeal to a cross-section -- a large section of consumers, and this is backed by very strong business models and economics. And as you heard, Mark talked about the people capability that we have that positions us very, very well to capture the opportunities still unfolding in front of us. In addition, we have the second engine in Pizza Hut also revving up.

Oh. Well, now I really -- let's see. Why don't I go to the next one?

[Technical Difficulty]

Oh, here I go.

Tim Jerzyk

You're good?

Lily Hsieh

I think. Yes, that's right. Okay, my apology. You've heard us talked about development opportunity before. And here's our track record in the last 10 years. From 10 years ago in 400 stores, and now we are over 4,000 stores. So we grew by a factor of 10 in the last decade. And I would like to suggest to you that we'll continue to have robust growth that is yet to come.

I hope I got it right. Okay, the government plan that was published end of last year, which generally known as the '12 -- 5-year plan published by the government. And one of the top priorities is to shift the growth model of the economy from export dependency into much more domestic consumption. And this is going to be triggered partly by urbanization and transport network across China and in particular, also in the interior regions as well.

Urbanization today reaches about -- sorry. Well, urbanization today reaches about half of the population, and this is going to continue to increase by about 1% per year. And 1% represents roughly 17 million of population. And if you think about that in terms of the scale, in 4 years, and you will have a new urban population almost the size of United Kingdom. And by contrast, the urbanization rate in the developed economy, generally is at least 70% to 80%. So China today is only half of it and you can imagine the growth still ahead of us. With this urbanization, as well as the transport network, we'll have roughly 20-plus in terms of city clusters being forming across China. And then these transport city clusters are backed by intercity transport network as well as a lot of the subway and MTR construction within the city as well in order to support China urbanization. And this is particularly evident in the interior regions where you'll see a lot of industrial investments are being made. And as well as the real income growth in double digits. And so as we -- the ground team will see it, the golden years of the retail growth are still yet to come.

Let me give you an illustration of what that means. What you see here now is a city by the name of Changsha, and Changsha is located in central China. It's a Tier 2 city, it is a capital of the Hunan province. The population today is about 3 million and we expect that population to double in the next 10 years. And this will call for a massive residential construction in the city as well as in the outskirt of the city, expanding hugely the city scope. And this is going to be supported by the -- a lot of mass transit systems being built within the city itself. Currently, there are 4 lines of subway are underway, and this is going to be completed within 3 years by 2015. The longer-term actually -- plan calls for 6 lines in total and there will be about 100 subway stations by then. So this is the kind of growth that you'll see in a Tier 2 city in China. In addition, this city also sits on the intersection point of the North-South railway from Beijing to Guangzhou as well as the East-West railing from Shanghai to the interior of China. And Changsha being at the crucial traffic hub, the intersecting point will also play a significant role in the future development as well.

There are many different versions in terms of how many cities that we'll have. The data that we catalog is that this kind of city will have well over 1,000 in China, so there is tremendous growth still to come. And in addition to the urbanization as well, as I mentioned, it also brings about a lot of infrastructure investment, and this airport gives you a snapshot of the growth trend that we have. Five years ago, we only had about 7 units in various airports. Today we have more than 40. And given the kind of airport numbers that are being built up, we're only in less than half of the airports that's still to be available for us to move into. So there's a significant growth in the airport presence expected to double at least in the next 5 years.

Similarly, also you have tremendous growth for the railway as well. The railway, I think you heard about the significant growth as experienced that you see that we have high-speed rail station for about 13, and then -- and 41, these also represents tremendous growth in the past while. And also, we expect to double in the next 5 years. In addition to the intercity rail link, there's actually extensive subway station being built within each of these new city as well. Today we have about, in total, around 800 subway stations. And we expect it to, again, double in the next 5 years getting to around 1,500 subways. And all of these represent great opportunity particularly on the transport system.

So we have great opportunity ahead of us. And how does Yum! Brands capture that? Particularly a lot of opportunities will be coming up in the inland provinces, in the Tier 3 and below city. And some of you may wonder, now how do we do there? Now here's a snapshot in terms of our economic model, and you can see that we are very, very -- our economic model is very strong and we are looking at cash margins of -- in the mid-20s. And in fact, these models are at least equally as strong as you'll see in the coastal region and if not, better. And the cost advantages in fact is actually being brought about by advantages in terms of lower labor costs, as well as rental as well.

And let me turn to the Pizza Hut. The Pizza Hut which is now about to rev up their development engine. Pizza Hut today actually has been able to appeal to a very, very large consumer base. It can extend and reach into large as well as small city as well. I want to give you an illustration on the map there on the coastal area of China in the middle of the coastline there is the Jiangsu province. The Jiangsu province actually sits just north of Shanghai city, which many of you may have been there already.

In the Jiangsu province, the Pizza Hut presence, about 5 years ago, we were in about only 5 cities. And today it's actually 21 cities already. And Jiangsu province is a province that currently has a population of around 70 million or so, almost similar to size of Germany in terms of population, and then the -- and also with an income of just close to $3,000. And the Tier 5 city that you've -- that Pizza Hut has been into in about 21 cities expect to easily double in the future 5 years. Another perspective I'd like to share with you is that the number of cities that Pizza Hut is in today is about 1/4 of the KFC cities that are currently in China. So you can fill in the blanks with your own imagination if Pizza Huts were able to catch up with the kind of KFC expansion in China.

So I guess with all of the opportunities ahead of us, and unless we have strong capability to capture that, that will amount not to too much. Let me give you -- share with you our capability on ground. We have more than 700 development professionals on ground, across China, and we have continued to invest and upgrade that capability as well. We have very, very rich know-how and huge database catalog, obviously evident from many of our stores presence in China, in -- both in terms of QSR segment as well as in casual dining as well. We continue to follow the kind of strong discipline that we have in each store, in each new unit in terms of our decision-making process, our approval, as well as our tracking. And with that kind of capability, we are actually ready, poised for another breakthrough in terms of our development pace.

And you have already Dave talked about it and also Mark talked about it, that you see our track record in the past 10 years that every couple of years, we are able to raise our level to another step. And every couple years, we increase by -- our development pace by about 100 units or so. And this year, we are about to be able to raise from a 500 platform from last year to this year to more than 600 per annum, and we expect that trend to continue. And year-to-date, as of quarter 3, and we already have new builds for 430, and we're well on our way to deliver our 600th for this year.

So I guess in summary, you hear from all 3 of us talk about the great opportunity in China. And you hear Mark talk about the people capability, which is the bedrock of our growth and our operating capability on ground. We have very, very powerful brands. We have envious average unit volume for both brands. And the assets are working 24 hours a day. And many of our assets are working 24 hours a day, all year round, very, very powerful brands, and that translates to very strong economics. And that, in turn, also makes our development potential very, very strong in China. And we have a very, very strong world-class development capability as well. And with all of this and with the power to attract growing consumer class you hear David talk about, today, we have $300 million, expect to double that within 10 years. And I think we are well positioned to capture that opportunity.

And so with all that, I hope that you can share with us, the ground team, that -- the optimism as well as enthusiasm that we feel that the future growth in China is still unfolding. Thank you.

Tim Jerzyk

Okay, we'll have a short Q&A section for our China team, the China presenters, Mark, Angela and Lily. We'll have some folks out in the audience with handheld mics. Do we have any questions? Yes, Jeff? Jeff?

Question-and-Answer Session

Jeffrey F. Omohundro - Wells Fargo Securities, LLC, Research Division

Thanks. Jeff Omohundro from Wells Fargo. Just a question on East Dawning and the expectation around ramping up development later in the decade. I'm just wondering if you could elaborate a bit on how you're preparing the concept for accelerated growth, and specifically how you're enhancing unit economics.

Angela Loh

I think David had mentioned that it takes time to build brand right, just like we build any brand. And some of my colleagues asked me, says, "Angela, how -- when are you going to reach 5,000 or 4,000 stores of East Dawning?" I told them, I said, "18 years ago when I joined KFC, it's only 7 restaurants. So give me 20 years. I'll give you another 4,000." Right? So because today, we already have 20 East Dawning. So I think it takes time to build a brand. And first, you have to start with -- we know there's a consumer need out there, we just have to get the product right. We have to get the product right; we have to get the pricing formula right; and we have to give them -- we have to find ways, just like I presented for all our other brands. We got to have marketing initiatives that support different age group. So I think we have a -- definitely have a huge challenge ahead of us, but we are confident with our experience and know-how that we have accumulated through building other brands we will have a great future for the East Dawning too.

Tim Jerzyk

Yes, over here. Joe.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joe Buckley of Bank America Merrill Lynch. A couple of questions on pricing as you approach 2012. Are you making adjustments to the value menu here in the fourth quarter, the breakfast and lunch value menu, to get some additional effect of pricing on top of the 7% you're running year-over-year? And then as you go into 2012, do you think you'll maintain that high single-digit year-over-year pricing throughout the year?

Lily Hsieh

Yes. We have -- as you heard our presentations, we did take actually 3 pricing throughout 2011, one early in the year and also in quarter 4 as well. So that actually -- in addition to that, as part of that pricing also, we have made some, in terms of the value offer, price level adjustments. So altogether, these are the pricing, as well as the menu price adjustments, value price adjustment that we made in 2011. I guess going into 2012, we'll continue that kind of discipline that we will continue to watch what the inflation situation will be, and we'll be very disciplined about our pricing action as it needed to be to ensure our margin structure is there.

Tim Jerzyk

Okay, over here with John.

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

John Ivankoe of JPMorgan. I was hoping we could talk about how to grow the KFC average unit volume, especially with what is obviously going to be a concept that sees significant unit growth, including more markets where there already are KFCs, so could you talk about where things like breakfast and 24-hours, perhaps delivery currently are and how big do you think they could be? If you get up to that $1.7 million target that you've laid out for us.

Mark Chu

The -- just the one clarification, the $1.7 million is where we are at, our run rate today for KFC.

Angela Loh

Okay. As I mentioned earlier in my presentation, I think there is a lot of sales layer we continue to add to the brand. And for the breakfast itself, we launched the day-part 8 years ago and with just a few cities. And we continue to roll out this program to the ready cities when people can afford and have changing lifestyles. And when we first launched, the first few years, they are only a minimum part of our business. And now, they are about 4% of our sales. But this is -- again, this is the ground floor, our breakfast day part, because if you look at McDonald's business, they have more than 10%, 15% of their breakfast sales, so we think we are definitely at the ground floor. Again, for the 24-hours, delivery, it's -- we are just starting it. We plan to see it. We think we can start having a significant part of that growth in the next 3, 5 years. So I think we are very confident that we can, by adding all those days parts and new sales layers and service models and we are able to continue to strengthen our unit volume sales.

Tim Jerzyk

Okay, in the back.

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

Sara Senatore, Sanford Bernstein. Just a question about the, I guess the value and the initiatives you're doing to introduce new people to your restaurants, and maybe bringing in people who hadn't previously been able to afford or use KFC in particular. Are -- do you see a difference in how they use the restaurant versus maybe your core customers? Like are they more price sensitive? Or do they eat there differently, different day parts? Just trying to think through what it means to bring in basically a new consuming class every year.

Angela Loh

I think we are, every year we are attracting new customers by offering value programs and new product lines. But we are also letting the old customer, our current customer increase their frequency by giving them more service style, like delivery and breakfast. So it's a mixed result. For our new customers, they are new to our -- they are new to us -- they are new users and they will start with the mainstream product. They will probably coming for the mealtimes only. But for our current customers, our loyal customers, they will start using our new services. So it's a mix of usage occasions, but I think we are offering a broad range of service into different customer profile.

Tim Jerzyk

Do you want to add to it? Okay, over here?

John S. Glass - Morgan Stanley, Research Division

John Glass from Morgan Stanley. Can you just clarify in the value initiatives that you offered in 2011, have you, as the year progress, needed to modify them? Or do you plan to modify them given the high food cost inflation that you've experienced of which you've had to pull back in some of those? And secondly, Angela, as a marketer, can you just give some insight on how you think you can lap these very strong traffic increases in 2011? Are there ways you can just slightly change the offer to make it more appealing? Maybe some way for us to start to think about the tremendous traffic gains you got in 2011?

Angela Loh

Okay. If I can repeat myself, I think this year's significant sales growth is not just contributed by the value program. They are contributed by value programs, new day parts, new product pipelines, new categories. So the value program's just part of our program. We can see -- we can say actually for the breakfast and the lunch, weekday lunch we are offering them we are changing consumers' habits. Because they -- in the past, they eat breakfast at home, but now they have a great opportunity to have a very affordable price point. They can be relaxed and having the -- a great breakfast at KFC with a very affordable price, so we are actually launching this day parts and value programs to change consumers' habits. I think, David have always coached us that we have to change to build consumers' habits, perception and belief of the brand. And I think we are doing a lot of things to changing consumers' habits. And of course, due to the inflation, we will closely monitor how much value we can give to our consumers. But I think the most important thing is to find the price point, the magic price point, the sweet spot that can attract the most consumer coming to our stores more frequently.

Mark Chu

Angela, you might want to also address, maybe give one example on the scope of the value platform. Maybe, so the price points, maybe like even for whether it's breakfast or the lunch, weekday lunch, so it's not just one price point.

Angela Loh

Yes. For -- actually, we have different price layers for breakfast offer and also for lunch offer. Although we call it value programs, but for breakfast, we have the entry price point of RMB 6, but we also have RMB 8, RMB 10 and RMB 12 options, menu options for consumer to choose to eat a little better than the basic one. And for lunch also, although we have the RMB 15 entry price point, but our core customers coming to buy the RMB 18, RMB 19, RMB 20 price point breaks and lunch. And also, this lunch, we also only offer during the weekday and certain hours, so it's not really the biggest portion of our cost structure at this point.

Tim Jerzyk

It's okay. One more over here and then we'll be -- we'll end the Q&A.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jeff Bernstein from Barclays. This is a follow-on from kind of the inflation and pricing perspective. One, I was just wondering as you think about food inflation, I know you entered this year thinking it was going to be 6%, 7%, and obviously, it ran a little bit on everybody. So I know in the fourth quarter, you were thinking it was going to be in the mid-teens from an inflation perspective. So I'm just wondering if you can give some insights into the forecast for next year where you say it's going to be around 6%. I know it's starting the year higher, but I'm just wondering what kind of visibility you have on that front that doesn't potentially run on that. And as you talk about -- just separately, as you talk about the pricing that you could take on that front, do you do any you work to test the elasticity of that pricing? Because I know 7% or higher seems somewhat high, and I know the level of competition in China is obviously pretty significant, the level below you. So I'm just wondering how the consumer responds to aggressive pricing if you needed to do that.

Mark Chu

Let me respond on the commodity side first. And then Angela or Lily, you can talk about the pricing. On the commodity, Jeff, commodities, we'll cover that more in the financial modeling session. But the biggest, I think the headline on that is, as Rick said, I think earlier, we expect continuation of high commodity inflation to continue into the first quarter and then moderate as the year goes on. And we'll provide you some more details on that in the modeling session. Angela, do you want to cover the -- how you think about and implement pricing?

Angela Loh

How we would...

Mark Chu

Think about pricing and implement it? The second half of the question.

Angela Loh

Yes, I think we mentioned earlier that we will consider the pricing -- moderate pricing in the second quarter next year. I said...

Mark Chu

Then you might want to expand on the thought process and what you do in terms of testing and how you're expanding, like even beyond one zone where you used to be several years ago.

Angela Loh

Okay. Actually, we do different pricing tiers, even within the same cities. For locations that -- with higher rent, higher -- like transportation hub, we were actually -- if it's an enclosed area, we actually have a higher price. So I think we do that because we are in more than 700 cities, so there are a lot of test market, test cities, test trade zones that we can do to make sure that before we roll out nationally or even just regionally, they are -- the pricing will be successful.

Tim Jerzyk

Okay, great. Thank you, Mark, Angela and Lily. And now, we'll continue on with our agenda with Niren Chaudhary. Okay. Okay.

Niren Chaudhary

Good morning. My name is Niren Chaudhary and I've been with Yum! for the last 17 years, working across different geographies in the U.K., the Netherlands and Germany and the last 4 extremely exciting years in India. It's a pleasure to be able to present to you the Yum! India opportunity.

You're familiar with the India growth story. One of the world's fastest-growing economies in the world. A consumer class that is expected to double over the next 5 years. Now there are 3 reasons why I believe that the growth story is solid, intact and will sustain.

First off, India today is exactly at the same inflection point as China was before it took off. India is about 10 years behind China and mirrors the same macros. Second, India is forecasted to have the largest workforce and the lowest dependency ratios in the world for the next several years, implying thereby that there will be enough labor and capital to continue to drive the economy. And third, India, unlike China, is a consumption-driven economy and therefore likely to continue to grow even in the face of a potential global slowdown.

Now the eating-out market in India is a huge opportunity both at the macro and the micro level. At the macro level, the size of the market is estimated to be about $90 billion, of which less than 2% is organized, but growing rapidly. At the micro level, the eating-out frequency for our brands is only 1 every 40 days and compare that to 1 every 2 days in our more developed markets. So taken together, this is huge. And Yum! India, I believe, is uniquely positioned to leverage this exciting opportunity with its people capability and proven business models.

Now 2011 has been a year of huge inflection for Yum! India when having opened more than 100 new stores and broken even as a business unit, we feel even more confident to take our growth story to the next level. The real breakthrough has happened on KFC in India. And the rest of the presentation, I'm going to focus primarily on KFC.

Now we've re-entered with KFC in India in 2005 with equity and franchise ownership. And today we have more than 150 stores in over 35 cities, system sales growth in excess of 60% making KFC the fastest-growing QSR brand in India.

There are 2 insights that are influencing our consumer strategy and thinking on KFC. First as you know, India is one of the youngest countries in the world, with more than 60% of the population, that is 600 million people, below the age of 30. The youth are also over indexed on literacy and therefore aspire more and consume more. The second insight is that importance of value, particularly price point value in India to drive penetration. And one of the most dramatic examples of that is the mobile telephone industry in India, which has a subscriber base of more than 850 million people, making it the second largest mobile market anywhere in the world. And this happened when it was possible for consumers to buy handsets for less than $20 and recharge vouchers for less than $0.10. So taken together what this means for KFC India is that we need to ensure that KFC, we build it as an aspirational brand that is highly affordable for it to be successful.

We then went to school on our success in Yum! China and identified 2 important learnings that we're building on. First, build a broad concept as early on as possible so that KFC as a brand stands for much more than chicken. And second, the importance of establishing first mover advantage in new cities, in new trade areas wherever possible. And that, taken together for KFC in India, implies that KFC needs to be innovative and also needs to drive leadership by penetrating much faster than our competition with flagship locations.

So let me now share with you how we are building KFC India as an aspirational brand that is broadly relevant and deeply accessible and affordable for our consumers in India. So we're building it as an aspirational, iconic brand with a brand presence on the street with assets that have clearly the look of the leader. Bold exteriors, confident exteriors and warm contemporary interiors. A cool [ph] place where the young can come together with their friends and families and have a great time over great-tasting food and beverage.

We want KFC to be an "any time, every time" brand, and having successfully established a strong core with chicken-on-the-bone and our sandwich business, we are now successfully establishing new layers like branded beverages or Krushers, and KFC is becoming a beverage destination for the youth. And also the grilled platform, which I'm particularly excited about because it is in the land of tandoori chicken. And we've come up with this product called fiery chicken which is so fiery that I believe it blows your brains out, but the Indians describe that as being mildly flavorful.

We're also appropriately localizing our food with expanding our vegetarian options like vegetarian Zinger sandwich and spicier snacking products like Hot Wings, so that we have a whole array and a range of great tasting, wide variety of food for our consumers with the appropriate kick. We're also testing new day parts like breakfast so that we can make our assets even more efficiently in terms of the utilization in the years to come.

We have launched delivery across all of our stores to make it convenient for our customers to access us from home, if relevant. And our value strategy is to offer a compelling price point with no quality compromise and to keep it very targeted. We have launched the successful Streetwise program that offers students, the young people the opportunity to access KFC for prices as low as $0.50.

Let me now show you a commercial that captures the essence of how we are building KFC as a youthful aspirational brand in India.


Hope you liked that. And we're delivering this by building world-class capability and operating standards to execute against our brand promise of flavorful taste. So 100% of our restaurant general managers are graduates. And given that every year we are hiring between 5,000 to 6,000 new team members, we're establishing Yum! academies to create a pipeline of skilled team members. We also guarantee the taste of our food for our consumers in our stores; it's either tasty or it's free. And then we reinforce our taste credentials by offering our customers and inviting them for kitchen tours so that they can see for themselves our high standards of food safety, hygiene and the way in which we segregate our vegetarian and non-vegetarian cooking.

The strategy is working, and the business model is looking strong with average unit volumes in excess of $1 million and investment which is less than half that, we are seeing China-like payback of approximately 3 years. And what is especially encouraging is that KFC as a brand seems to be working everywhere. It's working across active, high-speed, small food courts and also across markets, big cities, small cities, future cities. We are seeing, in fact, disproportionate success in Tier 2 towns, and all of that fills us up with enormous confidence at the scalability of KFC as an idea in India. Young China is our inspiration and it is reassuring to see that our growth trajectory is very similar to that of China in the first 10 years, and we aspire to match that in the future as well and grow our KFC business to over 500 stores in more than 75 cities by 2015, with equity playing a dominant role.

Our vision is to be the #1 restaurant company in every category in which we operate. Our goal is to have 1,000 stores and a billion-dollar business by 2015. And whilst KFC will be the main growth engine in the near term, we are equally excited with the future growth potential of our other brands, Pizza Hut and Taco Bell. And towards this end, Yum! is deepening its commitments to the India project with equity participation not only in KFC, but also in Pizza Hut Home Delivery and Taco Bell. I really believe that we're in the ground floor of a significant opportunity here and that we're in the right time, the right place with the right brands to build an extraordinary business for Yum! in India. Thank you for listening.

Tim Jerzyk

Okay, we have just a few moments for you to ask a couple of questions for Niren. Yes, right out front here, if you can get up right here.

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

It's David Tarantino from Baird. Just a question, you made the comparison of India to China pretty well. And just curious to know your thoughts as you look out and when you make that comparison, what are the biggest differences you see between India and China that may pose opportunities or challenges as you look out over the next 10 to 20 years?

Niren Chaudhary

I think at the macro level, I think clearly, India as an economy and as a country I think is behind on infrastructure development. I think we -- China spends 2x its GDP on infrastructure than does India. So India has sort of muddling through that process. I think at some stage, we'll probably begin to constrain us as it looks right now. So that's at the macroeconomic model. I think on -- and when we compare our 2 businesses, Yum! in India and Yum! in China, I think China is more than 10x the size of what we are right now. And therefore, I think there's a huge headroom of opportunity for us to really emulate the same success that we've had in China. I think many of the lessons are the same, I talked about that. I think making sure -- because we're on the ground floor, we can be anything that we want to be. We can create the brand almost new and make it as broad development and as deeply accessible as possible. And that's the China model and that's what we are essentially building on. So I think that's similar. I think the people capability, the intrinsic talent pool that is available is very similar. I think the passion, the belief, the ambition that people have to be the best is very similar. So I think there's lots that we can learn and replicate and build a big business. Now whether India -- Yum! India can be as big as China or not I think it's too commissural to say, but it's certainly, I think we can say we're confident that we can build a huge business compared to where we are today.

Tim Jerzyk

Okay, there in the back.

Gregory R. Badishkanian - Citigroup Inc, Research Division

Greg Badishkanian, Citigroup. Just with the breakeven profitability in 2001, how should we think about sales leverage and profitability over the next 3, 4 years with the incremental sales that you expect?

Niren Chaudhary

Yes, I think our sort of ambition is more around building Yum! India as a growth engine the right way for the long term. And our focus is on really driving aggressive growth in the near term and deliver profitability, I think in the midterm, so say around 2015 is when I believe that we will be making a material contribution to Yum! But until then I think our whole passion and focus is around building the capability, building the right culture, building the right infrastructure to be able to be in a good position to grow at a much faster pace and build a huge business.

Tim Jerzyk

Okay. We have time for one more. Over here. Yes, Joe.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joe Buckley with BofA Merrill. A 1,000-store target by 2015, how do you think that'll be split between company-operated stores and franchised stores and maybe by brand, if you would address that as well?

Samuel Su

Yes, sure. So I think we see KFC as being the dominant growth engine. I think roughly half of the stores will be KFC, with equity having at least maybe a 60% or 70% share of that. And the other half is going to be Pizza Hut, provided they're broken up between the dine-in business and Pizza Hut home service business. And like I mentioned, we are going to be playing a more active equity role on the home service side, but not really on the dine-in side. So in summary, therefore, KFC is going to be both through equity and franchise development. Pizza Hut home service also through equity and franchise development. And Pizza Hut dine-in is going to be through franchise development. And Taco Bell, as I mentioned, is still in incubation and we're sort of testing the proposition for the future with equity investment.

Tim Jerzyk

Okay. Thank you, Niren. Okay, ready to start the YRI section with Micky Pant.

Muktesh Pant

Thank you. There have been multiple references to YRI already. And I thought David Novak did a great job giving you of an overview of some of the exciting things that are happening in continents like Africa and other places.

The one thing I did want to repeat from what David said at the introduction is that I have been with -- this is my seventh year with YRI now. And initially I started off as a Chief Marketing Officer. And then I added to that with the responsibility of building Taco Bell globally. And then for the last 4 years I've also had 7 of the 15 business units reporting to me. And that included all the emerging markets, so Africa, Latin America and Asia.

So the one thing you can be assured of is continuity in the management of YRI. And that is important because YRI has become a large business. It's principally franchise-led. But if you look at the chart on the left, you can see that we've been building between 450 and 500 net new units every year. That's fairly steady rate of progression. We've crossed 14,000 units, and nearly 90% of these are franchise.

Now we operate YRI or our brands in over 100 countries. And that number kind of rolls off the tongue bit, when you say 100 countries. So what I thought I might do in preparation for this meeting, I've printed off a list of the countries in which we do, do business. And I thought I'd take a few short seconds to read out some of the names of these countries. And in your mind's eye, if you can portray a globe and try if you can, drop a pin when you hear the name of a country, if you know where it is.

Aside from places like Venezuela and Colombia and Mauritius, which you probably can't place, we have stores in -- almost 20 stores in places like Brunei and Guam. And we have significant stores in Namibia, and Cambodia, and Syria, Kazakhstan, Swaziland and Botswana and Serbia and Armenia and Guadeloupe, Lithuania, St. Lucia, and Andorra, Saipan, Samoa, Zambia, Moldova. I could carry on with the list. But I think you'll see from that, that it makes sense to have a franchise model, because you need local market knowledge and capability. And so this is ideally suited. So the chart that you see on the left, we first expect to continue significant growth in number of units. Secondly, we expect to maintain a significantly franchise-led business model.

And then you could see from the right that profitability has been growing, on average, at about 10% a year over the last 5 years. One of the reasons why I'm optimistic that on both these counts, that is new unit development as well as in profitability, that we might in fact be able to break out of this rate of growth and accelerate it is that they're reaching, as David referenced, the tipping point with several strategic initiatives that have been made over the last 10 years.

On the top left, Russia. David already covered the logic for it, that we got, in 2 or 3 years, a scale which otherwise would have taken over a decade. But the interesting thing is that as we are converting our stores from rustic KFC to KFC, 90% of the products that we sell there are KFC products, and consumers switched over very rapidly. And I'm also pleased to report that Russia, if you rank all the list of countries by way of same-store sales growth, ranks pretty much near the top with very significant double-digit same-store sales growth. So the experiment is going really well. We feel very optimistic about our prospects there.

And on the top right, there have been multiple references to Africa. I think the one thing I will say is that the small equity investment that we made in South Africa will be very significant as a base for training franchisees. We've historically had a strong business in South Africa. And by the way, there's -- it's quite a significant profit contributor already by way of the royalties that we get in South Africa. And we ventured sort of to nearby markets, like Namibia and Swaziland and Lesotho, Botswana in the past. But over the last couple of years, we've gone further afield into the bigger markets of Africa through franchising. And this will continue to do that through franchisees, so markets like Nigeria and Kenya and Zambia and Zimbabwe. We are entering good franchisees. But the South African business proves very nice training ground for these franchisees. It also enables us to get some nice G&A in South Africa. South Africa is a great talent pool, it's English-speaking. People work there in adverse circumstances, and South African executives tend normally to be extremely good managing multinational businesses.

My personal thing, I've been doing emerging markets for a long time in my career is that, I think Africa will continue to surprise us in terms of the contribution that it makes, not just to Yum!'s business, but to the world overall. And I think when I look -- when I travel there and see the scale and size of the Chinese investment in Africa, virtually everywhere, it gives me a lot of cause for optimism.

The other thing is that, our brand is very dominant in Africa. People love fried chicken, and our competitor is not even close. We lead them by a country mile in South Africa. And most of these other countries I mentioned including Nigeria, Zambia and Ghana, they're not even there.

And then on the bottom you see 2 examples of strategic investments that have been made, that are paying dividends, France and Germany. These 2 countries alone have got more than 2,500 McDonald's, a highly profitable McDonald's. And you'll hear later from our very talented General Manager of France, Ivan Schofield. So I won't spend much time on France. But very quickly on Germany. Very significant market, highly profitable, the largest economy in Europe. And we are that close now to replicating what was achieved in France, which is scale sufficient to get on television for advertising. In our business, when you get on television, there's a multiplier effect on demand, and we achieved that in France a couple of years ago. We're very close to getting there on Germany.

So if you take these 2 together, France and Germany, they represent a very significant opportunity. And one of the things that we've done very recently in our reorganization is recognizing Ivan's leadership skill. He's a creator of West European business unit, of which Ivan is the leader. And he now oversees not only France and Spain, as he's been doing historically, but also Germany and the Netherlands. And we believe that driving synergies in these 2 very important markets, France and Germany, is going to be very significant to as we grow YRI.

All this has resulted in some quite smart redeployment of capital. The Russian acquisition, South African kind of salting and catalyzing developments through the equity investment in South Africa. And also sensibly in other markets, so Mexico is a great case. Mexico is an emerging market. However, we did not have great margins there. We had a good business, a large business, but not great margins, they are volatile.

And in neighboring Guatemala, we have a fabulous franchisee. In Salvador actually, Francisco Rivera that David referenced earlier, running our fabulous businesses in El Salvador and Guatemala with a lot of hunger for food. So we sold them the Mexican business. And our belief that Mexico is better run as a franchised business is being blown out in this first year of the franchise operation by Francisco. And we're feeling optimistic about continual -- that the royalty stream coming out of Mexico will be much more rich and rewarding, than the somewhat volatile earnings that we had when we had equity in that market.

Lastly, we have been selling off Pizza Hut dine-in businesses in developed countries. We announced our intent in the U.K., and we have almost 700 stores in the U.K. equally split between dine in and delivery businesses. And we've announced our intent to sell that business as you're well aware. Pizza Hut in the U.K. by the way is an extremely strong brand. It's one of the, sort of, dearly beloved legacy brands in the U.K., has had a 40-year history. And we wish to continue to grow the brand there, and we just wish to transfer ownership. And to transfer the ownership in the right way as we did with, for example Mexico, if it takes time, it'll take time. But that having been said, it is our intention in 2012 to transfer and divest our interest in the Pizza Hut Equity business.

And that will complete really that the divestment in our significant developed countries. For those of you who've had a longer timeline association with YRI, you're aware that we sold down our presence in Japan. Years ago we franchised Canada, and we've refranchised our entire Pizza Hut interest in Australia. And this will, pretty much, complete the trick.

And we're shifting our investment to emerging markets, where the story is actually looking very good, particularly for KFC, but even for the Pizza Hut delivery. The reason why we're getting strong new unit development in emerging market is that we have very, very good returns on capital in these businesses. It's somewhat light here, so I'll read off the list of countries Malaysia, Indonesia, Philippines, Russia, South Africa, all uniformly showing that a cash payback is less than 3 years. That's critical to franchisees, important to us as well. So we will continue to drive this bias for emerging markets.

I borrowed a slide from Rick Carucci's presentation, I thought would be sort of bear repetition here, which is that I think of China and India as gigantic opportunities which they absolutely are. We should not lose focus on the fact that we call YRI the remaining part of the world outside of China, India and the United States, is over 4 billion people, and does account for almost 2/3 of global GDP as well. And if you take just the top 8 countries that constitute YRI, making up the top 10 countries in the world, that's over 1 billion people, and we just have 2,000 restaurants. Just over 1.5 for every 1 million people. And in fact, if you take the entire 4 billion people in YRI, even with the 14,000 restaurants that we do have, that's just about 3 restaurants per 1 million people. About the same penetration as in China, so we expect to continue to grow that very rapidly.

So short summary, we expect to see -- continue to see new unit development. In fact, it will be my goal to accelerate that on Pizza Hut delivery, as well as on KFC. And while it will be a loss to have India not be counted as part of our numbers, you saw there were built over 100 stores this year. We expect that certainly from 2013 onwards that we will get back to the space of developing 450 to 500 units. But David constantly reminds me that he wants to make that number even next year. And we'll do our very best to do that. But we expect very strong new unit development to continue in YRI.

Having said that, we have 14,000 units outside of these new units, and it's our job to build sales there as well. And this is a chart that you've heard multiple references to already. But very quickly, there are 3 incremental sales layers that I've had the privilege to work on for the last 5 years. I'm very confident that we are reaching now levels of traction that'll help us drive same-store sales in our markets as well as will contribute significant incremental sales to stores that are already open. And then lastly, the most incremental day part of them all, which is breakfast. Most of our KFCs globally open only at 11:00 in the morning. I understand sometimes MacDonald's has already done 15% of their day's business. And we started this work a few years ago, and are getting extremely encouraging results in countries like Hong Kong and Singapore and the Philippines, and most recently in South Africa. And we expect to roll out breakfast quite rapidly. And also in the developed countries, Martin Shuker is leading an experiment to establish the economics for having breakfast in developed market economics. And we're working hard to be able to get that going.

So these 3 layers: Beverages, grilled options and breakfast will contribute significant incremental sales of stores that are already open. And with all of that, with new unit builds as well as building same-store sales, our goal by 2015 is to get to $1 billion operating profit, even without India. And as you can see, between the red and blue, which represent emerging and developed countries, that the bias for growth will be in emerging markets. But even if global economic trends shift, we are well covered by having a presence in developed countries as well.

So by way of quick summary, the first, we are a franchise-led business, quite predictable, low capital employed, high returns. The second is that we're reaching the tipping point in critical markets like Africa and Russia and Germany and in France. We are redeploying our capital intelligently all the time to get out of low-margin businesses into more high-margin, faster-growing businesses. We are leveraging existing assets with new sales layers. And lastly, we continue to see a huge runway for growth. I could make the argument that YRI actually is the single largest growth potential when you look at the size of population and the macros.

The 2 businesses that we wish to present in further close-up today are interesting for different reasons. France, because it always tickles me to tell my friends that the biggest selling KFC in the world is not in Louisville in Kentucky, but it's actually Lyon and Paris. And people find it hard to believe. But for those of you who've been to France and seen the fabulous business that Ivan has built there, it's a real jewel. And establishes a model by which we think we can attack McDonald's in the developed markets, the Western Europe, where they make a lot of money and we can give them a run for some of that money. And the second is to prove to you that even in developed countries, we do have a lot of developed markets like Japan and Canada and Australia. The great example is the U.K. where, in spite of odds and in spite of being well penetrated, we've had a good record of growth of both new units and same-store sales under the leadership of Martin Shuker. So we'll present those 2 businesses to you, and then the 3 of us and along with our CFO David Gibbs, who's present, come up on the stage and take questions.

So at this stage I'd like introduce our General Manager for the Western European Business Unit, Ivan Schofield.

Ivan Schofield

Morning, everyone. As David said before, I've been with the company for 12 years now and I've spent all of that time looking at KFC in Europe, initially for 3 years as a CFO in the U.K. and in New York. And I've been running KFC in France for 9 years.

I last spoke to you, if you remember, 2 years ago here in New York. I think it's true to say that since then, KFC France has really come of age. We're going to close the year out with 133 stores; just under $0.5 billion of sales. Our margins have grown very, very fast this year and we really feel as though we're poised now for the next phase of growth.

We opened our 100th restaurant in March 2010; it was obviously a very proud moment for the organization. It took us about 9 years to get to the 100th store mark. And what was particularly interesting as well was the gentleman who turned up to inaugurate the restaurant; his name, if you don't recognize him, is Jean-François Copé, and he's the head of the ruling political party in France. And many people tip him to be President of the Republic in 2013. Now he, like many other senior politicians, come along to our store openings these days. I think on the one hand being politicians, they come along because they're interested to be associated with a brand which is so appealing to their electorate. But also they see the investment we're making. Since the 2000 -- the recession started in 2008, we've invested well over $200 million in France. We create about 1,500 jobs per year, which puts us in the top 10 of job creators in the whole country and we've created 7,000 jobs since we started development again back in 2003 in a country which has youth unemployment of about 25%. So if you like, we have star quality for politicians these days, which really wasn't even the case 2 years ago.

Our formula for building a strong, we like to say iconic brand in France, is really quite simple. Brand-building assets, category-leading products, which lead the category in terms of taste, but are also sub brands which build our master brand KFC, and world-class operations, with what we call a culture that the customer sees. Because you can have great operations processes, train people all you like, but if you don't treat them well at the restaurant level on a day-to-day basis, they won't smile for you.

And this is really the formula that we've applied to get to where we are today; 133 restaurants and I said, just under $0.5 billion of sales.

In terms of development, we go quite simply for the best sites in the best trade zones in the biggest cities. This leads us head-to-head with McDonald's where -- because in France they frankly have one of the best asset bases in their global system. And it's that asset strategy which has enabled us to maintain our AUVs across this accelerated development cycle. We're still at about $4 million per restaurant per year.

So the high AUVs, improving model -- improving margins through the work we've been doing in the economic model and reducing investment cost just through the scale of investment, is leading to even more attractive economics. As you can see, we're present everywhere in France now and that's the thing, as has been referred to before, which enabled us to get on national TV to generate the advertising funds to do it, but also to make a national TV efficient.

We realized quite early on in our development that we would have to use every opportunity at our disposal to communicate what the brand's about. And one of those opportunities is the decor. This is our latest interior design in our restaurant go KFC in Bayonne, in the Southwest of France. And this restaurant really stands proudly next to the very best that McDonald's can do and France again is one of their best markets in terms of decor in the world.

The decor pack explains the heritage of the brand, where we've come from 70 years ago in Kentucky, explains how the product is made and in particular, the fact that it's made by hand in store, something which appeals greatly French customers, whilst also providing a really fun, convivial and comfortable dining environment for the customers.

We're also experimenting with service systems, self-order kiosks are a big thing in France. We're probably the leading market in the world with that, and half of our restaurants in France have self-order kiosks. And this particular restaurant has a new service system in which the customer orders in one place and picks the food up in another, which Martin will talk about in a moment. So really an innovative asset which is helping us build our brand.

Franchising is integral to our development strategy in France. As you may remember, France -- we use business rental as our standard franchising model in the market, which means that we will buy land, we take head leases and then build the building and lease that to the franchisee for a rent expressed as percentage of his sales. This model allows us to attract the best operators to our brand. People who wouldn't otherwise have the money to be able to become franchisees with us. People, such as the ones that you see on this slide, all of whom actually worked in the QSR industry for 10 or 15 years. And they're typical of the profile of franchisees we attract, 10 to 15 years of retail or restaurant experience. It's their first entrepreneurial adventure. And in most cases they've sold their houses, remortgaged their houses to become franchisees, but they really know what they're doing. They run great operations, they run great margins, and as a result of that, they're earning more money than -- certainly a lot more money than they were making as employees previously.

We, and they, think that the sweet spot for them long term is to have 4 to 6, maybe 7 restaurants because that enables them to run their business very tightly. They don't need a G&A structure to run it at that level. And so that's the plan going forward. We have 30 franchisees today, nearly. But in 5 years' time, it will be closer to 60, and you'll see the significance of that later.

And the other key pillar of our strategy in France is around product innovation. We recognized early on that we were going to have to make some significant changes to the core KFC global menu for it to work in France. And today products which have been developed in France for the French market, account for about 50% of our total sales. So if we hadn't innovated in the right way, we wouldn't be where we are today.

Just to quickly cycle through some opportunities, and I'll show you some TVCs in a moment. The buckets business is going really strongly. We have the strongest bucket business expressed as a percent of sales amongst our peer group in Western Europe and including the U.K., albeit it takes a different form from a lot of historical KFC markets because it's all finger food. Crispy strips, hot wings and not really the 9-piece chicken on the bone that you might know.

The sandwich category is huge in France, and if we want to be in the QSR game in France, we needed to build a strong stable of sandwich or portable products; the Boxmaster is the leading one amongst those. And this is a product which we've driven through TV advertising. And in the next year or 2, this brand, in and of itself, should be worth $100 million.

And then finally the Kreamball, which is our iconic product within the desserts category. We sell a dessert with between 30% and 40% of all of our transactions. French customers prefer to eat complete meals and the Kreamball is a really iconic product we developed to beat the McFlurry on taste, whilst also being highly differentiated in terms of its positioning.

So at this point I'll show you 2 TVCs on -- firstly one that's on air in France at the moment for the dips bucket. There are subtitles there so you'll understand it. But it really touches at an insight that we see everywhere around the world, which is that the bucket is an opportunity to get the family back together. And then the Boxmaster, which is the commercial which drove our very strong same-store sales growth in Q2 which we've already disclosed to you. And here there aren't subtitles because that all goes too fast, but the only word you really need to understand for those of you who paid attention in French classes at school is the word faim, which means hungry because that's all the guy is hearing. So hungry is he. So let's look at the ads.


So our brand equity is really strong in France now. According to our research, we track our brand image versus the competition and we're winning on food. We're also winning on service, which for me is a remarkable achievement given the pace of development that we've gone through, and the fact that we only have 10 years cumulative experience in the market compared to the competition with 30 or 40 years. We tie on value and we tie on restaurant assets, although we'd be confident of even getting a win on that based on what we're doing today with restaurants like KFC Bayonne.

The big challenge and opportunity for us is brand awareness. Right now our brand awareness, spontaneous awareness, sits at only about 30%. So people just don't know who we are. And you can see between 2009 and 2010, and I'll give the number for 2009, but it really steps up. And that was because of TV advertising. We only had 8 weeks on air in 2010, and yet we saw great sales growth as we disclosed to you as I said, and the awareness we leapt. This year we were on air for 17 weeks. And next year 2012, we'll be on air for 24 weeks. So this growth in brand awareness should mathematically drive same-store sales growth, and also allow us to penetrate into smaller cities also cannibalize ourselves in cities where we're already present.

So if we've come of age in the last 2 years, the next 5 years will really transform us. We'll grow to 300 restaurants by 2016. And you'll see we will do that mainly through franchising. We want to keep a relatively small, tight equity business with very high volumes, very high operating standards. And then use franchising, business rental franchising which Yum! will deploy its capital to produce the net unit growth. And so our system will become a majority franchise system in the not-too-distant future.

Moreover, the brand will really become a national brand. And we're already bigger in the provinces than we are in the Paris region today. But 80% of the restaurants we open in the next 5 years will be in the provinces.

All of that will take us to $1 billion of sales and we think that we can convert 10% of that system sales number into operating profit because of the fact that we're generating more revenue from business rental than we would do in our normal franchise system, and due to the fact that we plan to run a very high margin, very high volume equity business which, whilst small in number of units, will be very high -- very large in terms of the sales that they generate.

So to summarize, we feel as though we have a clear formula. The formula works in France. We're deploying the same formula in Germany, as Micky said with success. We're also doing it in Spain where we decided to re-enter the market with equity and we'll do so in 2012.

It's capital-intensive, developing in Europe, but you won't need reminding that McDonald's made just under $3 billion of profit there and if we can just make 1/3 of that, we'll have created another YRI. For us, my team, we're off the ground floor now in Europe. The hardest part is actually behind us. We've learned a lot. We share know-how better than we ever have done, and as I say we have a clear blueprint for how we're going to build the brand and compete with McDonald's.

France will be the first one to get to $1 billion, but there will be others. And I honestly believe that the future has never looked so bright for KFC in Western Europe. Thank you.

I'll now hand over to my friend and colleague from over the channel, Martin Shuker.

Martin Shuker

Good morning, everybody. My name is Martin Shuker. I’ve had the pleasure of working at Yum! for 16 years. I've done 5 jobs. First 3 were in marketing, working at KFC, leading marketing in the U.K. then across Europe, then across our international markets. I've done 2 General Manager's job, the first leading KFC and Pizza Hut across Europe. And I've been in my current job leading KFC in the U.K. for the past 8 years.

And if I leave you with just one message today, KFC -- if you do the right thing by KFC, anywhere, it absolutely works. To perhaps illustrate that, let's look at KFC U.K. sales over the past 10 years. This is expressed in pounds, but you can see our system sales in the last 10 years have actually grown from just shy of GBP 400 million to GBP 800 million.

We have a long history in the U.K. KFC actually started back in 1965. Started like a fish and chip shop would do in the U.K.: Small assets, secondary locations, not giving our consumers a great experience. But as the QSR market began to evolve and change, as the competitive set began to evolve and change, the KFC brand clearly needed to do so as well.

And what I'd like to talk to you about this morning is to illustrate to you what we've done in the U.K. to ensure that KFC has been successful, and is relevant and contemporary as a brand. So if I look to the last 5 years, what you'll have seen us do is actually have 5 consecutive years of same-store sales and profit growth. So KFC in the U.K. this year will generate $84 million worth of profit. And we have done that by focusing on 4 things: Our people, our assets, our food and our service. And if you'll indulge me, what I'll do is actually walk you through each one of those 4 to illustrate the types of things that we have done.

People capability and operational capability is the lifeblood of any restaurant business. We were a brand that was really targeting growth 5 years ago, and we had a problem. Because although people inside the company thought this is a great place to work, the external perspective was I'm unclear. So what we sought to do was actually to go and change the external perspective of what it was like to work at KFC. The way to do that was to get some external accreditation of what it was like to work at KFC. So we worked up and teamed up with Britain's top employers, the award across the U.K. and we came second, right throughout the whole of the U.K. in 2009. And in the past 2 years, we've entered to be featured amongst the great places to work award, which in the last 3 years we've been featured in the top 50 and indeed last year, we were featured in the top 30.

And it's clearly working, because although we employ in the U.K. 24,000 people, this year alone we will have had 350,000 applicants to come and join KFC. And people inside the company are feeling that as well, because their retention -- our retention rates are much, much better. They've dropped by 30 points in the last 5 years. That's because we're giving them career growth and personal growth through things like apprenticeship. So our people capability is strong.

In terms of assets and new unit growth, in the U.K. we have 825 restaurants and broadly 1/3 are owned and operated by the company and 2/3 by our franchise partners. We have 35 franchise partners in the U.K. And what we've been able to do in those past 5 years is consistently grow 35 to 40 new restaurants a year, broadly split 1/3 company, 2/3 franchise because we are delivering good, consistent returns that represent a long-term attractive investment for us and for our franchise bond. We have 800 restaurants -- over 800 restaurants today. McDonald's has 1,200, and we are very confident and excited about the continued growth prospects for the brand in the U.K.

And about food, that is clearly the thing that differentiates, distinguishes the KFC brand. In-store prepared chicken and the great taste that it provides is the differentiator for the brand. And we are very clear that, that is the difference that we will communicate to our consumers. But just because we've had a long history and a long legacy in the U.K., don't think of us as an old and a traditional brand. Chicken on a bone would represent less than 30% of our total sales. We are a broad contemporary concept. So finger food, sandwiches or burgers, as we would call it, are the lion's share of the business that we have. Because we have a strong value menu, we are able to attract consumers of all ages, across all day parts to come and eat inexpensively at KFC to enjoy the food and the service that we provide.

We've been broadening our range with a distinctive range of beverages, the Krushers brands that you've heard about, that has continued to be very successful in the U.K. And we've continued to contemporize the brand by focusing on nutrition. Nutrition is very important in the U.K., and we've been doing this for a long time. So 6 years ago, we stopped salting our fries. Six years ago we've begun a program where we reduce the amount of salt in our recipes every single year. Last year we changed our oil such that we reduced our saturated fat by 25%. This year we've posted nutritional values on our menu board. We're conveying to our consumers that you can afford to eat KFC as part of a balanced diet and enjoy it. And that is the responsible thing for us to do.

But we're also adding to that strong foundation with innovation. So this year we've invested right across the estate in those same rationale oven that enabled us to broaden our menu. We successfully tested in 2011 a new oven-based product, a rancher, a barbecue rancher. We've tested that in Scotland and that will launch nationally throughout the U.K. during 2012.

And as we talked about on breakfast, we've been very focused on 2011 in 7 restaurants to get our breakfast proposition just right. And what we will do in the first half of next year is take that to a national TV advertise test market to demonstrate that we can get the consumer awareness -- consumer penetration trial to make that a big success for the brand.

And lastly on operations. This is the initiative that Ivan talked about. What we've been able to do in the U.K. is actually match and surpass the operational standards and capability of our franchise partners. So when we go and talk to our franchise partners about improvements that we want to make in our operational system, we have the credibility to be able to do that.

In 2011 what we've tested and proven is this initiative we call project Fusion, which is separating the order from the pickup. What this basically does in a nutshell is drive sales. Because our team members can focus on one thing, taking the order and giving great hospitality, focus on delivering the order with great speed. And what this does is it drives the hospitality, it drives our ticket average. It drives speed, it unlocks the peak when we have the key opportunity to drive our sales so it drives top line sales.

From January of next year, we will be opening all of our new restaurants in the U.K. with our service system, and all of our 10-year refurbishments will be featured with this new service system as well. So those are the 4 things that we've done that have made the KFC brand as strong as it is today in the U.K.

The KFC brand is a familiar brand, it's got a great resonance with all of the U.K. consumers. And that's because with those strong foundations, we continue to put back and innovate across food, people, community and the environment.

And I want to play you just one commercial which just kind of reflects the natural warmth and appeal that the KFC brand has with our consumer. Let's have a look at the commercial.


It's that one thought, if you do the right thing by KFC, it works absolutely everywhere. You have to do people, food, service and asset. And that's what we've been trying to do in the last 5 and 10 years in the U.K. to deliver the results we have, which makes us excited about our future prospects.

So we look forward in the next 5 years to be able to grow our system sales up toward $1.8 billion. To grow our restaurants up towards the GBP 1,000 mark -- to the 1,000 unit mark and to, as a consequence, grow our operating profit up towards $130 million. Thank you very much.

Tim Jerzyk

Okay. Now we'll have some time for Q&A for the YRI team. And as Micky mentioned earlier, David Gibbs, CFO for YRI will join us as well on stage. Let's get going with Q&A. Over here. Pick which one is closest to you.

Unknown Analyst

Question on the U.K. The reimaging that McDonald's has done there, they seem to have transformed their asset base and I know just walking through London, it seems like the Burger Kings that are nearby look pretty old. Could you give us a sense of your asset base in the U.K. and what you're doing about that?

David Gibbs

Absolutely. Let me talk a wee bit about all 3. That's exactly what McDonald's has been doing the last 5 years. And they've virtually completed their cycle, and I think the consumer has been paying dividends to that because their strategy is absolutely there. I'm pleased to say in the KFC brand, at the end of this year, 96% of all of our assets will have been remodeled in the last 5 years. So we feel very confident about the image and presentation of our brand. I think the other brand you mentioned, Burger King, has not presented virtually contemporary image, and has probably struggled as a result.

Tim Jerzyk

Over here again, Michael.

Michael Kelter - Goldman Sachs Group Inc., Research Division

Mike Kelter, Goldman Sachs. I wanted to ask by refranchising, I guess question for Micky, by refranchising Australia, Japan and the U.K. it certainly has evolved the business in YRI to be much higher growth, but a byproduct of that might be that it's a wilder swing in results, given that the macroeconomic cycles there are exaggerated and currency moves are exaggerated in emerging markets. So I'm curious if you could talk about any steps that you can take to maybe smooth those swings over time and I guess that, or whether we should just be used to those -- that kind of fluctuation and volatility.

Muktesh Pant

Well, firstly we believe that franchise revenues are more predictable and sales deleverage is much more controlled in a franchise environment. So should there be sales deleverage on the kind of macroeconomic factors or even currency, we see much less effect franchise because that's fixed royalty on sales, whereas an equity can be a little more. Equity has the beauty of upside. So there's nothing like a well-run equity business, but nothing as damaging as a bad -- as one that's not doing very well. Having said that, I think that it is our goal to make the business more profitable and more predictable. And if you look at the last 5 years, the only exception has been 2009, where we did have a bit of a currency effect, but otherwise we've been able to grow profit year-on-year over the last 5 years fairly steadily. We expect to continue that trend. Certainly [indiscernible] Q3 of this year which was also public, but going forward as well. So we don't really see that the franchising of Japan or Canada or the Pizza Hut businesses in Australia has made the business more volatile. In fact, if anything, it's smoothed it out. And generally speaking when we get our monthly results, the franchise businesses are more like clockwork. It's the equity business that you have to keep a closer eye on.

Unknown Analyst

Micky, one other -- maybe one other aspect you could touch on would be the fact that, even within the emerging markets we're in, what, 60-some countries emerging markets, all the businesses are in different stages and different phases of their growth cycle, different brands, so that you may have a particular issue in a market in one year, but at the same time you may have another one at the tipping point that growth accelerates?

Muktesh Pant

Yes, you've summed it well.

Tim Jerzyk

Kind of benefit of the portfolio. Yes, okay. John Glass over there.

John S. Glass - Morgan Stanley, Research Division

Two questions. One is could you just comment on the status of the asset base of YRI overall? I know you're showing us markets that you're proud of, France, the U.K., where you've updated them, but can you maybe talk about what the average age of the remodeled asset is on a portfolio basis. Are there areas that you still need to put re-investment in? Question one for one. Micky, so just clarify your comments on refranchising. Is the U.K. Pizza Hut refranchising the last big market you'd like to refranchise within YRI? Or are there others you haven't talked about? It wasn't clear from your comments what is the end or not?

Muktesh Pant

Yes. As far as I can see, I think Pizza Hut U.K. will be the last big one to refranchise. Because the other developed market businesses are KFC. And you’ve seen, whether it's France or the U.K., that we're able to make a go of it. So I don't expect to see any refranchising in our -- in other developed countries. As to the question on asset refurbishment, I think the news is very good. I think of the last meeting or the one before that we had shared, and I'm quoting off the top of my head, but about 2/3 of our assets in YRI have been refurbished to standard. And that number has increased quite dramatically over last 5 years. Now the significant markets, for example, in Canada where our estate does not look good, we're focused on trying to improve that by looking at our franchise base there. But in general, in countries where we have 500 stores or less, which is the majority, our estate looks extremely good. I would say the vulnerabilities would be Japan and Canada. And we've focused on those. And in Japan, in fact, the news is quite good. Mitsubishi which is our franchisee, recently after several years of net negative stores, has actually started building net positive new stores. And also have been investing in the very latest designs. So they've taken some of the great work that Ivan's done in France and replicated that in stores, for example, in Tokyo. So if I was to take outside of Japan and Canada, I'd say our estate is in extraordinarily good shape. But even including those 2/3 of the stores, look very good indeed.

Tim Jerzyk

Okay, in the back, Mary?

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

It's Sara Senatore of Bernstein. Two unrelated questions. One is about breakfast. I think that's the key you've identified to getting asset leverage and the kind of unit volumes you need in some of the higher cost markets. Can you just talk about how difficult it is to enter that market and what you can do to differentiate? It looks like you may be co-branding or using coffee brands to give yourselves credibility. But just trying to understand the strategy, because it's so difficult to penetrate that market. And the other question is about the supply chain in China, it's an owned system and then trying to understand if that's the practice in other emerging markets?

Martin Shuker

Well, if I try and talk about the first question, which was about breakfast in a developed market, we have been testing various initiatives in the past 2, 2.5 years in the U.K. And to be fair, we've got lots of learning. And we didn't necessarily get it right the first time. What we have seen in the last year is the range that we have developed has very broad and very wide consumer appeal. Breakfast consumers tend to be quite conservative. So if you try to be very differentiated in terms of your taste profile, you can sometimes not necessarily appeal to the broad base of consumers that we want. So the range that we have developed is much more mainstream, but we believe differentiated on superior taste, which should be consistent with the KFC brand. And what we have seen in our test markets that we've done is that when people try our breakfast, they like it. But the reality is because we haven't gone through a TV test market, we haven't had high awareness, therefore we haven't had trials, and therefore we've not yet broken through. But on the basis that when the people do try it, they love it and they repeat, all we need to do is actually get the awareness. That's why we're going to a TV advertise test market during next year when we are confident or optimistic of our chances to succeed.

Muktesh Pant

Just add to that, a couple of things. The first is that when we started breakfast at KFC, there was a degree of skepticism, because KFC you normally associated with buckets of chicken and sort of dinner. But we were pleasantly surprised that virtually everywhere in the world where we've tried breakfast, and there's a lot of sort of nervous butterflies in the stomach in the morning when you first open a store for breakfast because you've never done that before, is that people come from, I don't know where, but you start getting traffic and you see traffic, and there seems to be no inhibition going to a KFC and having breakfast. In certain markets, city states like Singapore and Hong Kong, we immediately got to double-digit sales contribution and very profitable because those businesses have got very low labor costs. In others, the uptake was somewhat slower. And also costs of labor in markets like the ones that Martin operates in are high, so we've got to still work the -- work how to make it work. However, I think we can be confident that we will have breakfast in place. We recognize it took McDonald's 10 years before they established the layer, we've only been at it for 3 years. I think in emerging markets, we've got a very good formula now. Both the operating system, the product range, the pricing, the learnings on how to build awareness, as smart as we think we are, we skipped some of the most basic things like telling people that we were open for breakfast. We did a lot of elaborate marketing, but just signaling to people that the restaurant is open at 7:00 in the morning is an important part of developing traffic. So a short summary to your question, I think we will have breakfast very widely across the system. And we've also taken learnings to your cobranding question on the experiments that Greg Creed did in the U.K., so cobranding does work. Martin had the best example with Lavazza coffee. Lavazza, very premium coffee brand which they've introduced in the U.K. Particularly with coffee, people are very careful with what they have first thing in the morning. And so we found cobranding in coffee very effective. And there are other opportunities to cobrand. So PepsiCo has gotten a Quaker business and we are collaborating with them to see whether we can do the oatmeal business through them and so on. But overall, I said I'm optimistic that we're seeing a clear runway for developing breakfast.

Tim Jerzyk

On the supply chain question and the comparison to China. Supply chain in YRI is actually very different than China. China is predominantly a company-operated business, has very centralized control of their supply chain, does a fantastic job leveraging their scale. At YRI, given the nature of our franchise business, we have some large franchisees, such as Americana in the Middle East that actually operates other brands. And they can leverage their own scale in executing supply chain in their market. So we have a little bit more of a decentralized approach at YRI to supply chain. But what I will say is we see supply chain as an area of opportunity going forward. Some of you may be familiar with some initiatives we've done in the United States to capture some upside in supply chain that have worked quite well. We're taking that methodology to YRI, and early days, but feel very encouraged that we have the ability to better leverage our scale in a different way than China and produce some tangible results with it.

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

John Ivankoe. Questions on the U.K. and I've tried to piece together a couple of different numbers that are in the presentations; bear with me, please. I guess in fiscal '10 in GBP, you have $791 million of sales and in fiscal '11, around 825 units, so that would arithmetically be somewhere around $1 million or GBP 1 million per unit sales. Now, I mean historically, we've been taught that the U.K. is a very high-cost market in rent, very high cost in labor. It's an extremely competitive market, especially on High Streets for your consumer lunch, and maybe especially lunch, but also dinner as well. So was hoping that maybe, as Ivan did with France, to kind of walk through the economics of investing in the new unit and why company ownership should go up as opposed to go down in what is such a competitive high cost and what looks like to you not particularly high averaging of volume market.

Martin Shuker

I think our forward strategy is to continue to do what we've done in the past 5 years, which is to have broad growth both company and franchise because we've been seeing the returns. Our asset strategy is skewed towards drive-thrus. If you look at high streets where inevitably the occupancy cost is higher, it's harder to get the returns that we would want. But our historic profile of development has been highly skewed towards drive-thru, which has been yielding very consistent and attractive returns.

Tim Jerzyk

Okay, that's all the time we have for you guys, Thanks very much. We have one more presenter before we wrap up today, Mr. Greg Creed with Taco Bell.

Greg Creed

Well, it's now good afternoon, everybody rather than good morning. So good afternoon. I think I know a lot of you. For those I don't know, I'm Greg Creed. I started my Yum! career in '94, spent the first 7 years in YRI running the marketing for KFC and Pizza Hut in Australia. Then I came to Taco Bell in 2001 as the Chief Marketing Officer for Taco Bell. In 2006, the Chief Operating Officer for Yum! and for the last 5 years, I've had the privilege to lead Taco Bell. So that's a little bit about me.

So as I was sort of putting this presentation together, I thought, "How do you describe 2011?" And there were a number of words that came to mind but being Australian, most of them were inappropriate. And so I tried to find a word that I thought I could actually say, you could actually write about, but still captured with real clarity the sort of year we've had, and that would be terrible.

We had really a terrible 2011. I think there were 2 things going into the year, which we fundamentally knew were going to happen. The economy would be tough and food inflation would be high. And those we had prepared a plan for. What really caught us in an unexpected way was the bogus lawsuit that occurred really in the middle of January this year.

I just want to touch on that just for a little minute. I mean, it came out of the blue. As I said, it's bogus. It was withdrawn after 90 days. I want to be very clear with everybody. We didn't change the recipe. We didn't pay the plaintiff $0.01. We didn't pay the plaintiff's attorneys $0.01. But it had an impact. And I think in this digital and social world that we live in, we've got to obviously look at how we minimize that impact in an emerging and changing social world.

And it was very clear we didn't have enough innovation to overcome the thing that we hadn't thought would happen, which was the lawsuit. But I want to reassure you that our beef wins. And so we have tested our beef against all of our competitors in the marketplace and consistently, we've got a 70-30 win. We win across all of the attributes. We measure somewhere between 12 to 15 attributes on all of these products. So we're winning in overall, and we're winning across all of those attributes. But as I said earlier, it did have an impact on both our reach and our frequency because there were unfortunately some people who actually believed the story. And in this social world of friends telling friends, it's not as easy to control the message.

However, I really want to make sure you understand that this is a beloved and a powerful brand. These are third quarter numbers where we compare, if you have a look at -- we have about 4 times the number of Facebook fans per restaurant as McDonald's does, very similar to Starbucks. And there's a scorecard in that sentiment that really comes -- well, the company's called NetBase. It really comes mainly off Twitter, but it's also other social areas that we use. And basically, it's the net of the positives and the negatives being said about your brand. And I think it's very clear that we are much more like Starbucks as a brand than we are like McDonald's. So despite what's happened with the lawsuit, a truly beloved and a powerful brand. So the good thing is we obviously have used 2011 to set ourselves up for a very successful 2012.

And like all things, we need discipline around insights in order to make sure we are addressing those insights that we can use to drive the business. Now there has been a fundamental category shift in the last 10 years that I've been at Taco Bell and in the United States. And that is that food has moved from being fuel to be really being an experience. It's not just about filling up, it's actually about a way and type of life. And the second thing is that for Taco Bell to be successful going forward, it's really clear what we have to do. We have to be both a better Taco Bell and a more relevant Taco Bell.

Now this food as experience encouraged us to go out and get some outside help on food. And we've been working with a celebrity chef, her name is Lorena Garcia. She actually comes from Venezuela, is based in Miami. And we brought her in primarily to look at developing a signature line, a chef's signature line, which I will talk about. But what was really helpful and a real surprise addition, was she looked at all of the ingredients that we had on our menu. And she said, "Look, I think they're a little over flavored because the natural flavors are just not coming through." And so we have worked with Lorena on beans, chicken, steak, guacamole, pico. And what I'm really delighted about to say is we're going to be improving all of those core ingredients through 2012.

Now in some instances, it's not changing the protein platform. We will still sell as we have grilled all-white meat chicken breast. But we are going to change the marinade, not as heavy, not as overpowering and much more subtle and the flavors are really coming through. So Lorena has been a huge help to us, really in a way that we hadn't expected, but in helping us improve our core ingredients.

Well, as probably a lot of you know, in 1962, Glen Bell launched Taco Bell. So obviously next year we turn 50. And so I decided last year to hop on the plane with my team and fly down to Dallas. You're probably wondering why would I hop on the plane and fly down to Dallas. Well, I wanted to go and talk to our good friends at Frito-Lay about how could they help us reinvent the taco.

I'm not sure you know, there 34 different bun types in the category in the U.S. and there's only 1 taco. And we thought what better way to celebrate the 50th anniversary of Taco Bell than to reinvent the taco. So the teams have been collaborating, working incredibly well. And as you know, we've got a product called Doritos Locos Tacos, which is a shell made of Doritos nachos chips. It is the identical formula.

We've been in 3 test markets. We've had incredibly strong sales and transaction growth in all 3 of these test markets. We've been dragging a lot of incremental customers who have really neither not been coming in to see us or we've changed the frequency of visit in these test markets. It's been a massive operational win. We've improved our speed of transaction by 12 seconds. And if you listen to the McDonald's guys, they've always said that 6 seconds in the drive-thru is worth 1 point of same-store sales growth. In these tests, we've improved our already great speed by a further 12 seconds. And then finally, I think what it really does talk to is about our expanding strategic partnership, not just with PepsiCo, which obviously we have, but also with our media partners as we move to launching the Doritos Locos Taco in 2012.

But back to Irvine and Lorena Garcia. And we brought Lorena in to, as I said, help us work on chef-inspired products. And this really, I think address -- I want to address one of the key questions I get asked a lot, which is how has Chipotle impacted your business? And is there growth at your expense? So I want to answer this 2 ways, at a macro level and at a micro level. So at the macro level, there are about 2.5 times as many Chipotles as there are Del Tacos. But a Taco Bell customer is still more likely to visit Del Taco than they are a Chipotle. Now at the micro level, we just completed an analysis, we looked 2 major cities in the U.S. We looked at 79 restaurants where Chipotle had opened within a 2-mile radius of the Taco Bell. And what we have demonstrated is that the impact is less than 0.5 point of same-store sales growth.

So if you think Chipotle is a threat, I would have to disagree. I do think Chipotle is an opportunity because what it's done is expanded the trial and usage of Mexican food. It's got people to believe they can pay $8 for a bowl or a burrito. And I think that's created an opportunity for us to come in with what I believe is chef-inspired, world-class food by adding black beans, a corn salsa, a new rice, a new cilantro rice. And for those who've had a chance to try it, I think these are world-class products, every bit as good as Chipotle, but clearly are for well under $5. So I think that's another opportunity for Taco Bell.

Sales layers. And you've heard my colleagues at YRI talk about it. We have a very successful Fourthmeal business. We actually have a larger late-night business than McDonald's has. And we got there by actually opening and hour and an hour later. So we used to open 11:00, then 12:00, then 1:00 and then 2:00. And now we've become the late-night leader. So we view exactly the same in our testing of First Meal. So I wish to announce we are going to be launching First Meal, 800 stores in the Western region. It will go out early in 2012. And we're going to replicate the exact same model because we tested it and it works, which is that most of the stores on the West open at 9:00. We'll be opening at least 1 hour earlier, which is 8:00, some will be opening even earlier. And what we've demonstrated is with our menu, with the quality of the food, the menu that we're offering and the price point, that this is an attractive proposition that attracts both McDonald's and new customers into Taco Bell.

The exciting thing is it’s 100% incremental for us. So besides new day parts, the other thing is we obviously are working to make the menu both simpler and easier to navigate. So in January, we're moving from a flat presentation of our menu to what I would call a picture's worth a thousand words. And what better way to sell food than to have wonderful photographs of the food. So that will be going system-wide in just a couple of weeks.

David talked earlier about our operations. We've always been renowned for our speed. And as I said, it is called fast food. But what's interesting is those that were fast were never accurate. And so the challenge that I gave Rob Savage and his team is we need to be top 5 in both speed and accuracy. And through process, discipline, training and focus, as you know, we got recognized and David has already talked about it, for being top 3 out of 25 brands in both speed and accuracy. And also probably the brand that has the balance most correct. So I am very confident that we have world-class operations, and we're addressing the things that matter most to the customer.

In terms of new unit growth, we've been working with our franchise partners. We have identified, we think we can pull about $100,000 to $200,000 out of our current building. Obviously at the moment, that's all on paper, so we're going to be building 5 new -- 5 of these restaurants in the very early part of next year, both company and franchise will be building them. And obviously if we can get about $150,000 out of the cost of our freestanding drive-thrus, that will also be an aid to growth.

We've also been going to work on the Pizza Hut work on the Delco Lites, and looking at inline opportunities and drive-thrus with inline. And we see all of these as opportunities. So if we can drive our same-store sales or average unit volumes up by around $130,000 to $150,000, we can take $150,000 out of the cost, then clearly, that will accelerate the new unit growth potential in the United States.

As Rick referred to, we have an earn-the-right, I guess, policy and menu strategy that we've been looking at. And we've been working obviously with Yum!. We are going to remove our ownership from about 23% to 16%. We'll still own in excess of 800 restaurants. I think a bit like, as the YRI guys are saying, we're in no rush to do this. We'll probably do this over the next couple of years. But we're very clear on what the criteria are for those that we will be refranchising to. The first is you have to be a world-class operator, whether it's the top quintile or the top quartile, that's where you'll have to be. Second, a system track record of growth and reinvestment. Third, financially strong. And obviously, important to me, being a wonderful brand advocate. We also -- we believe we can use the refranchising of these 400 restaurants to also accelerate new unit growth.

So I think in summary what I would say is, next year is going to be a big comeback year. We're obviously going to do more than just recover from the beef lawsuit impact this year. I think it's behind what I would call quality news with the help of Lorena Garcia. I think the biggest innovation you'll have seen, which is the Doritos Locos Tacos, and then this really wonderful chef-inspired products that Lorena has also helped us to develop.

I think we continue in our progress to becoming world-class operators. But I know that our operators are delivering a real category-leading performance in both accuracy and speed. And then obviously, we will continue to both upgrade our assets as well as franchise about 400 restaurants.

So I think it's a very compelling story. I'm very excited about the year, not just 2012, but the years ahead. I think we're working on the right brand. And the thing that really continues to impress me is how much our customers love this brand. Thank you very much. I think we're going to take questions.

Tim Jerzyk

Yes. Okay, we have time for a few questions for Greg. I think over here, in the middle back here.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jeff Bernstein from Barclays. Just 2 questions, first on the breakfast. I know you talk about it being 100% incremental. Obviously, if you're opening up earlier, just wondering in the test markets and in terms of your expectations, what is in terms of the cost side of things, the sales, margins any kind of reference you can give on the financial metrics and perhaps if there's any franchisee pushback because oftentimes, franchisees struggle to make the push into breakfast.

Greg Creed

Yes. Well, the food and paper costs are very similar to our average food and paper cost for breakfast. I mean it is interesting that people assume it'll be incremental. But you could take a breakfast occasion away from a lunch and dinner occasion. But that's what we didn't see in the test market so that's why it was truly incremental. And in the first wave, which is the 800 stores, we've got about, obviously, all of the company stores and about half of the franchise stores that will be going with us on the West. So about 2/3 of all the stores that we would call in our Western region, which interestingly, I went back and looked at the late-night business, is no different when we originally wanted to go from 11:00 to 12:00, and then from 12:00 to 1:00. We had about half the franchisees that came with us and about half that sort of sat on the sideline and just watched it. So really, I think the attitude is the same. I don't see it being any different from what we did when we did late night. So food and paper costs around the same, really incremental, which was important to us, and I would say, really good solid franchise support.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

You might want to just talk about, you just met with the franchisees?

Greg Creed

Yes. We actually had a big meeting last week with 2 groups. [indiscernible], right? So we met with both the [indiscernible] team, which is the elected body, and also met with the Big 12. And we obviously rolled out all of these plans, as well they actually got to try all of these wonderful products. As I've said, I think from the breakfast menu point of view, very positive reception to the quality of the food, the menu that we've put together and the value proposition that we offer, as well as the economics behind it. And I think rave reviews around both the classic quality improvements that we're going to make as well as the chef signature line that we're going to make. And I had one franchisee who said, "I really like Doritos Locos Tacos." I said, "That's great." He said, "Yes, I just ate 8 of them." So I guess he liked them a lot as well.

Tim Jerzyk

Okay, we have somebody at the back.

Gregory R. Badishkanian - Citigroup Inc, Research Division

Greg Badishkanian, Citigroup. Just with respect to same-store sales comparisons for next year, how should we think about that with the lawsuit impact? Are these customers going to come back, which makes comparisons easy? Or will they not come back, which makes it kind of a neutral comparison?

Greg Creed

Well, the answer is -- it's a good question. And the answer is that we actually did some of this testing, like the Doritos Locos Taco, was tested in the very early days of the beef lawsuit. So I'm very confident that -- we were in Toledo probably only 4 or 5 weeks after the beef lawsuit broke, really in the heart of the dispute and we saw very strong positive same-store sales and same-store transaction. So as I said earlier, I'm confident that we can certainly overcome the lap, but I think really enhance the same-store sales performance through the quality improvements, through the DLC and through the chef-inspired range as well.

Tim Jerzyk

Okay, thank you, Greg. I think it's time for Yum! Q&A with David and Rick coming up, so have your questions ready, raise your hand if you have a question for Dave and Rick. We'll get to you in a second, Mitch. I do this coming from the back.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Mitch Speiser, Buckingham Research. When we think about the YRI segment, you are breaking out the India piece. It is still over 100 countries. Can you tell us why or perhaps the consideration to keep YRI as one big segment and if there's any thought about maybe breaking it up in terms of emerging markets versus developed or geographically to get a little more transparency into the business? And maybe on the flip side, what the benefits are to keep such a big segment under one leadership team?

David C. Novak

Yes. Well, I think that first of all, we looked at Graham Allan, who was the CEO of YRI Industries when he announced his retirement. We've been working together for a number of years. And so we've known for a year of his plans, and so we really had time to -- opportunity to step back and look at a number of different organizational options. And out of that, we decided to make India a separate division. And we also felt that we could evolve YRI. And a lot of the natural ways that you think that you might be able to organize, we can do that without really disrupting our organization. And so what we've done is we've taken our emerging markets, developed markets, put them in basic pods where we're going to be sharing know-how and then I think that we'll make what on the surface looks like a big, maybe potentially unwielding division much more smaller and much more relevant. So we'll get people to -- in low labor markets, for example, sharing their ideas on what they're doing operationally and from a pro rata perspective, and then we'll get people in the higher-cost labor markets working together. And we actually see pushing more out into the field. And because where this business really happens is at the local level. And we think that YRI will evolve. But as we evolve, we'll be pushing more and more of our resources out into the field where it really happens. And I was talking to Martin Shuker yesterday. We just had a YRI General Manager meeting in India, and Nicky brought everybody to India and we looked at the stores together and we shared best practices. But they broke up into natural work units and really, we're going to put more pressure on people that should be working together on like issues, coming up with the solutions themselves and they'll own it more and we'll put much more focus in that arena. And I would see Dallas ultimately being -- and YRI being smaller in numbers versus bigger.

Tim Jerzyk

Over here, John.

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

John Ivankoe. Much of my questions have been asked or eluded to a few different times that I wanted to ask you from a corporate level. The supply chain and distribution, specifically China's long stated as one of your core competencies of a market of having best of class and even operations in back end of that market before the back end really developed across the country overall. India may have a similar greater need, my opinion, you can share that or not, as China did in the late '90s in terms of where their supply chain is. So discuss your thoughts again from an organizational perspective of not taking your learnings of controlling the back end of China, but at least controlling a lot of the back end of China as you're controlling the back and of India. And whether you think -- and if not, whether you have the partners that come into play and quickly give you the types of things that are most important to your brand, which of course are accurate, safe food supply.

David C. Novak

Yes, yes. It's sort of interesting, if you look at our history in China, when we first decided to own the distribution system, it was really a defensive move. I mean, if you go back to Sam, and he made the decision a while back, he felt there was an expertise in the country in order to handle frozen, refrigerated and fresh products as well as dry goods. And so he felt he needed to do that to build his goal of leading restaurant brands in China as well as the world. So he felt he had to do that. Now pretty early on, the team there also recognized there was a huge offensive weapon. So when we look at going into smaller cities, et cetera, we've really been enabled by that distribution system. When India started out, we made the judgment, I think Niren made the point in the Q&A, we know that there's an infrastructure issue in India. However, our judgment at the time was the issue was the infrastructure, not the quality of distributors themselves. So we felt whether we owned it or a distributor owned the distribution system, they faced the same infrastructure challenges. In fact the distributors, for the most part, are quite professional. So it's a huge expertise at China. But really, outside of China, we don't own distribution anywhere in the world. But we'll always make the point of making sure that there's expertise to handle the products. The other piece as we go into emerging markets, what's really important is to make sure that they can handle our quality assurance, right? So we do want to make sure that suppliers can meet our standards of quality. Part of that obviously does include our distributors. So we do have some franchisees who are running their distribution systems in some of these markets or feel that they have to vertically integrate a little bit more than occurs elsewhere. But that's still, I'd say, the minority of the cases versus the majority. Overall, we want to keep dialing up supply chain. David Gibbs in the Q&A referred to U.S., we really did a study, and he led it when he was at Pizza Hut initially. Then the team there continued, which was let's really benchmark ourselves aggressively. And so we have used outside consultants, we think we have the opportunities to lower costs and get more innovation out of our supply chain, kind of take that across the globe.

Tim Jerzyk

And I think we have one over here. Joe?

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Yes, Joe Buckley of BofA Merrill Lynch. YRI question as well. We started to see the YRI same-store sales pick up a little bit in the aggregate and you've done a better job of breaking out emerging markets versus developed markets. Could you talk about the major developed markets and how you look at them in 2012 from a sales perspective? Will they continue to be in the aggregate kind of a drag on the overall performance or any signs of picking up or slowing down, given the macro developments around the world?

David C. Novak

I sort of said, we're not banking on a huge recovery in developed markets. So I think one of great things about our business, because we have low price points, you could make your own opportunity. So Martin gave a great example of that where KFC and McDonald's are both flourishing in the U.K. inside a pretty tough economy. You sort of see that Ivan in France, the economy there hasn't been that great, yet McDonald's and KFC are doing well. So we get to control our own destiny. I think it comes down to building the sales pointers that we talked about. And I think we have different -- it's hard to generalize, Joe, because you have different countries and different stages of that. So if you look at the U.K., they're probably the furthest along in establishing these sales layers. I'll probably say, the international markets, maybe Canada is the furthest behind in doing that. So I think you'll see mixed performance, as Micky put it in his presentation, we're assuming lower sales in developed markets than emerging markets just because you don't have the unit opportunity. So we rely on that less to drive profitability. But I'm pretty happy with the traction that we're getting in sales layers. Micky mentioned both beverages. As an example of that, Greg talked about the breakfast piece as well. And I do think that's a huge opportunity. My personal belief is that Greg's idea of breakfast could work for developed markets around the world. One of the things that he didn't spend a lot of time talking about is one of the advantages of opening an hour earlier, if you've got half the franchisees on board, the big challenge of economics on breakfast is getting the labor right in developed economies, and Mickey touched on that. And if you just have to open an hour earlier, that's a much easier sell to franchisees. And it's much easier to sort of hang in there. So the way China hung in there is they were able -- when they first started breakfast, Angela said they were at low mixes for a while. They were willing to do that because labor is cheap. You don't have that opportunity in developed markets, so the way of doing it, I think, could be the way Greg does it. As I sort of say, opening an hour earlier we may open for breakfast at 8:30 or 8:00, we'll own underachievers of America. I think we could own underachievers throughout the globe. So I do think it's an opportunity in order to build that day part. I think that would be the one day part in developed worlds where we don't have the traction yet. So we're working hard to try to solve that as Micky and Martin and Greg talked about.

Richard T. Carucci

I'm sure we'll have some mixed performance, but I just would assure everybody -- for all the people listening in the call from around the company, everybody knows, you're not going to get a very good bonus if you don't grow your sales, okay? So we're very focused on driving our same-store sales. And just in the quarter, we're focused on the core innovation plus making sure our value proposition's right. In the developed markets, usually when we get out of sync, it's when we don't have enough innovation and we don't have enough everyday value. And like Australia, for example, that's something that we're working on right now to turn around with KFC.

Tim Jerzyk

We have one in the back.

Gregory R. Badishkanian - Citigroup Inc, Research Division

Greg Badishkanian. So if you take China out and you look at -- your managers came up, they're all pretty optimistic, which business do you think has the most opportunity for dramatic improvement or upside from the current trend that they're seeing over the next 2 to 3 years? Example is India moving from breakeven to profitability or Taco Bell with some new initiatives and easier comparisons. I don't mean to put you on the spot with all your managers here. But what do you think has the most upside from here?

David C. Novak

I think if Taco Bell doesn't have a great year next year, I'm going to be really upset, okay? And I think -- by the way, I think that we have good times, bad times. And where you see the strength of a leader is how you handle the tough times. And I think the Taco Bell team is special. I have nothing but admiration for what the team has done. They did an excellent job handling the lawsuit. We just had the lawsuit happen. But there are not many people that's going to get on that plane and go to Frito-Lay and come up with a nacho cheese taco, okay? I like having guys like that on my team, okay? I like the fact that we've improved our operations and I think that you saw the numbers on Taco Bell, we've got a great brand. I mean, just talk to your friends and neighbors and ask them what their kids think of Taco Bell. People like to pile in there, end the night at Taco Bell. We create a lot -- we make life a lot of fun for a lot of people. So I think Taco Bell should do very well next year and not just because of the weak overlap, because I think we've got some major innovation that we feel good about.

Richard T. Carucci

Just remember in my short presentation, the businesses that'll contribute in the next several years, besides I agree with David on the U.S. businesses and Taco Bell, probably be France and Germany. France is starting to make serious money now. And as Ivan laid out, I think that's the closest in. Long-term, of course, we love India with 1 billion people. But I think in the next couple of years, it will be -- probably be less than Europe.

David C. Novak

What I hope you saw a little bit today, and it's a soft thing. I was talking to somebody at the break. It's like when we started our company years ago, we had the opportunity to go visit the top companies. I took my leadership team. We went to all of them. And what was the single biggest thing they all talked about is their culture. And that's the bedrock of the success of any company that's ever going to be great. The great thing about these guys up here, they all want to kick each other's butt, okay? And they all want to win. Martin wants to outgrow France and France wants to outgrow Germany, and that's kind of what we've got going. But the good thing is, is everybody works together, and that's the magic of our culture. We want to win for the right reasons, but nobody rooting against everybody, okay? And I think that really gives us a unique edge as we share know-how and get there. I guarantee you, in China, that team, they are so focused on overlapping the high sales, keeping things going. Mark Chu's talking about 600 plus, plus units, not 600 units. And we don't put pressure on people to do something they can't. We put pressure on people to bring what they can to bear the business and the results are going to be there. But we don't chase numbers. We're growing the way we're growing in China right now because that's what the team can do and they can do it in a world-class fashion. And we're just trying to put that kind of pressure. Back to your question on India. We looked at should we own our distribution company? Should we create our own distribution company in India? We had that discussion. We asked Niren. No, we don't need to because we think that the capability's there. We didn't have that capability in China. But if Niren said, "Hey, listen, we really need to make that happen to go after this 1 billion people," I promise you, we'd find the money. And the good news about our company is I'm asking these guys to put me in the fetal position on capital, bring us the ideas, we've got plenty of money. I'd much rather invest in the business than -- with high returns than buy back the stock. And so we're just waiting -- the more and more the opportunities come in where we can get high returns, we're going to put the money in there. Now meanwhile, we're not going to run Taco Bells that we could make more money on franchise fees. That's just kind of how we look at things.

Tim Jerzyk

I think we have one over here. David Palmer.

David Palmer - UBS Investment Bank, Research Division

This slide, I think it says Page 5 in Lily's presentation had this, the Tier 3 and below new unit performance. It looked like those were pretty darn good numbers. It looks like the return on cash investments, over 60% on these Tiers 3 and below. And some of these new economic development areas, I would imagine, would be Tier 3 and below. I mean – or I'm wondering if…

Richard T. Carucci

Quite a few is Tier 2s.

David Palmer - UBS Investment Bank, Research Division

Okay. So I guess my question is, are we going to see a meaningful migration in the new unit development to your Tier 3 and below with the obvious, where I'm going with this, of course, is that the complexion of returns on development from here?

Richard T. Carucci

We'll we've already been moving in that direction. If you look at Tier 3 and below cities now make up, the last several years, have made up about half of our new unit development. If anything, we see that number increasing a bit over time, partially because the infrastructure and the wealth just continues to be created in those smaller cities. So it's one of the things I said why, the reason I said I never felt our competitive position is stronger is that you go into some of these cities now and we'll have 6, 7 KFCs and 1 McDonald's. You'll have 4 KFC, no McDonald's. And when you look at that cumulatively, it's impressive. And obviously the returns are there for us, aided by our distribution system. So the good news is we have returns everywhere in China, so we're going to keep building. But it looks like it's going to continue to skew more towards the central part of the city, more towards the smaller cities and we're getting, as Lily said, very strong returns.

David C. Novak

Yes, I'm really excited about what we’re seeing in cities, even we've gone into -- Mark was talking yesterday about cities with 50,000 people in China. And we're doing okay. So I think there's huge opportunity. The way how that -- the word picture I'd give you on China, okay, is when you think about the U.S. and you just go into a small town America or every small city in America, you're going to go in, and I have a lot of admiration for this company, McDonald's, they're going to have the prime location in all those spots and a great business. They own that landscape in the U.S. I think what you're going to see in China as you drive into China 10 years from now, we're going to own that. We're going to have the very best locations, we're going -- that's what we're doing with our first mover advantage. McDonald's did a phenomenal job with that in the U.S. We're doing the exact same thing. And by the way, I mean look at all the places McDonald's is in and all the small towns where you see McDonald's in the United States, that's going to happen in China. Just more of it.

Tim Jerzyk

I'll turn it over to you, David.

David C. Novak

Okay. I'm just going to just wrap this up with one thing. I started out by trying to share with you what maybe I see that you don't see. And I want to close this discussion with something that we embarked on a couple of year ago. I talked about our achieving breakthrough results training that we've launched around the world. But one of the exercises that I like the most is called Hotshot Replaces Me. It's basically, as a leader, you want to look at your business, say if somebody was really good came in and took your place tomorrow, what would they do? And most leaders, if they're honest with themselves, they'd look at it and they'd know what that person would do. And since I like my job, I want to make sure I do it before somebody else does it, okay?

And we look -- and I've done that in the past, we realized, we took a big-time look at McDonald's. And McDonald's has done a great job building sales layers. So our company has been on a quest of trying to build more sales layers and leverage our assets throughout the days. And we're early days in this relative to McDonald's, but we're making a lot of progress on that.

But as a team when we look back, a couple of years ago, and sometimes it takes you 2 or 3 years to begin to make some progress on this. I mean, when we look at what are the other real opportunities that we have. We said one thing we've had is we've talked a lot about operations. We've done a lot in the operations area, but we don't have the consistency in operations all around the world that we'd like to do. So what we did is we brought in a consultant, then we had them best practice our best operations in the world. They go in, study what we're doing in China, study what we're doing in the U.K. in the more developed markets, study how we really turned around operations in France, because we have pockets of excellence. India is developing great operations, doing a great job. So we looked at those countries.

We also looked at our competition. We look at McDonald's. We talked to the ex-McDonald's management. We looked at their processes and discipline that they have, how they approach operations. We looked at Chick-fil-A, which is doing great, and we looked at other industries like Marriott, which has done an overall really damn good job in operations. And we made it our goal that we say what we're going to do is that we want to evolve this company, and we've been working on this the last couple of years. We want to evolve this company to be the best in the world at building great brands with one system of operational excellence as our foundation. And really, this is not really that complicated.

But what we learned studying the best of the best, ours and externally, is that there's high standards in accountability, tremendous focus on core processes and standards and constantly raising them. An extreme focus on people capability, then you take that and you drive that winning in-restaurant culture so that your customer actually feels the culture. Like another company we looked at was Southwest Airlines. When you fly Southwest Airlines, you feel their culture and the customer feels that. And then whatever you have supporting the restaurants at the headquarter levels, they live and breathe operations. And then basically everybody in the company owns a total customer experience. So that's basically -- this is the operating framework that we've been focused on the last couple of years.

And what I see is that we're beginning to make some significant progress in this arena. And I think if you look back in some of the presentations, you'll see that we're really focusing on the people. And this past year, the single biggest thing we've done is focus on making sure everybody understands what our standards are everywhere in the world, and making sure that we have identified the core processes that we want to have executed in every restaurant. So if you want a clean restaurant, are you using the Colonel's kitchen and Captain cleaning program? If you want a hospitable program, are using this program, et cetera, et cetera, et cetera.

So we worked on core processes and standards and I know it's not as sexy as talking about a new product, but I think that delivering the basics and doing it reliably, we think there's inherent sales potential in that. And I talked about earlier about the Pizza Hut U.S. program, where we're trying to target $1,200 a week just through operational excellence. That's starting to take shape. It's not something that you're going to see overnight, but I think it's definitely going to make us a better company. And I know if a hotshot came in and replaced me, they'd say, "Hey, this is something we can do better at in terms of making it consistent." And I'll tell you these guys here, and our operators and franchisees around the world are really passionate about us becoming world-class operators.

Now in 2012, we're going to take it to a whole different level, okay, in terms of focusing on operational excellence. It's going to be the year of taking of people with you for operational excellence. Now I've been teaching this leadership program that Rick made fun of and I guess I'll let him keep his job because he's halfway comedic. Not as funny as he thinks he is, okay? But bottom line is, is that I've been teaching this leadership program for 14 years. And people ask me, "Why do you spent so much time doing it?" Because sometimes I'll have done it up to 8 times a year, they're 3-day sessions. I'm totally immersed in it.

But every leader comes in, in our company with the single biggest thing that they're working on that can drive our business, the single biggest initiative that they have. And by the time they walk out of the meeting, they have a plan for having the right leadership mindset, a plan for developing a strategy structure and culture that moves that will make it come to life and then a plan to follow up. And then we follow up 40 days from then, 6 months later, and we have the coaches follow up and it really drives performance. So I always say when 50 people attend the program, "If you get this done, do you think we'll grow our stock?" And everybody goes, "Yes." Well, so me spending those 3 days is important.

Now the biggest thing that I've always heard when I taught this program is, "How do we take this to operations? How do we drive this deeper into the organization?" I'd like to cascade it. So that's the reason why I wrote the book, Taking People with You. Wrote the book basically which is the leadership program and then what we've done is we've created RGM, Restaurant General Manager and Area Coach training guides, and we've got them in 11 different languages so that every restaurant manager across our system is going to be challenged to work on the single biggest thing that's going to drive operational improvement in their store and have the book, they'll all receive the book and they'll also have training guides, e-learning on how to make it happen in their restaurant. And I think this is going to do a lot to keep driving our culture forward, building off what we did with our Achieving Breakthrough Results training that we launched around the world. And the book, by the way, uses a lot of that training. And all the proceeds go to the United Nations World Food Programme. And I think it's just going to be a great thing for our company. But it's just an example of how we're constantly trying to take the culture to a different level. And we know that until we get our culture, until we get operational excellence in every restaurant so that our customer feels it, we truly won't be the defining global company that feeds the world. We know that having that consistent operating experience is by far and away the single biggest thing we can do to give our brands the glory that they really deserve. Because our brands, as Martin said, man, when we do them right, when we have great products, great people, great assets, we win everywhere. And we think that this is a foundation that we can build on and take to a whole different level as we go into the future.

Never been excited about what we've been working on. I hope you felt the enthusiasm from the entire team today. I'm proud of these guys, I'd like to thank Tim Jerzyk and our IR team for the great job that they did as well. I think we have really -- whether you believe or not, we clearly believe and have more belief than ever before that we are on the ground floor of global growth, and it's China and a lot more. And we're going to grow China, we're going to grow YRI, we're going to grow India, we're going to grow U.S. That's our mindset. Some years we'll do better in some parts of the world than others. But believe me, we're going to attack this business like it's never been attacked before. So thank you very much. I appreciate your time and attention. Thanks.

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