Steve Schmitt - VP, Investor Relations and Corporate Strategy Greg Creed - CEO Pat Grismer - CFO Larry Gathof - Treasurer

John Glass - Morgan Stanley David Palmer - RBC Capital Markets Keith Siegner - UBS Diane Geissler - CLSA Karen Holthouse - Goldman Sachs Jeffrey Bernstein - Barclays Brian Bittner - Oppenheimer John Ivankoe - JPMorgan David Tarantino - Robert W. Baird Karen Short - Deutsche Bank Jason West - Credit Suisse Andrew Charles - Cowen and Company Jeff Farmer - Wells Fargo R.J. Hottovy - Morningstar Paul Westra - Stifel Joseph Buckley - Bank of America

Good morning. My name is Tom and I will be your conference operator today. At this time I would like to welcome everyone to the Yum! Brands Fourth Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I'd now like to turn the call over to Mr. Steve Schmitt, Vice President of Investor Relations and Corporate Strategy. Sir, you may begin your conference.

Thanks, Tom. Good morning everyone and thank you for joining us. On our call today are Greg Creed, CEO; and Pat Grismer, CFO. Also on today's call is Larry Gathof, Yum!'s Treasurer who will be participating in Q&A. Following remarks from Greg and Pat, we'll take your questions. I want to thank all of you who joined us in Texas for our Investor Conference in December. I would like to remind everyone that the presentations from this conference are available on our website. Before we get started, I would like to remind you that this conference call includes forward-looking statements. Forward-looking statements are subject to future events and uncertainties that could cause actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to the Investors section of the Yum! Brands website at yum.com to find disclosures and reconciliations of non-GAAP financial measures that may be used on today’s call. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. Please be advised that if you ask a question, it will be included in both our live conference and in future use of the recording. Finally, we would like to make you aware of the following upcoming Yum! Investor Events, our first quarter 2016 earnings will be released on Wednesday, April 20th. And with that, I'd like to turn the call over to Mr. Greg Creed.

Thank you, Steve, and good morning, everyone. I'm pleased that you could join us today as we share with you the opportunities ahead for Yum! as well as a review of our results. Before we get started, I want to underscore what I presented at our Investor Day in December. 2016 will be a transformational year for Yum!, as we complete the spinoff of our China division, ultimately creating two powerful independent focus growth companies. The fundamental goal of Yum! however is unchanged. We are 100% dedicated to building and strengthening KFC, Pizza Hut and Taco Bell all around the world as strong brand critical to delivering the same growth and creating shareholder value over the long-term. I’m pleased with the positive sales momentum we generated across the majority of Yum! In the fourth quarter. KFC China, for example, grew same-store sales 6% in the last quarter of 2015. This was a sequential improvement from the third quarter and in line with our expectations. Outside of China, each of our brand divisions grew same-store sales on a one and two-year basis. Our U.S. results in the fourth quarter were particularly strong for all three brands, as KFC posted six consecutive quarters of same-store sales growth. Taco Bell continued to outperform the category and Pizza Hut grew same-store sales 2%. On a tuning basis our fourth quarter comps in the U.S. were the best of the year with Pizza Hut at plus 2%, KFC at plus 8%, and Taco Bell at plus 10%. These successes complemented our international results in the quarter where KFC posted 2% same store sales growth with solid results in both emerging and developed markets and Pizza Hut grew same store sales 3% in emerging markets. Fourth-quarter EPS grew 11%, with full-year EPS growth of 3% in 2015 despite a 7% decline in the first half and 6 percentage points of foreign currency headwinds. For the full year, our brand divisions collectively grew operating profit 8% in constant currency, which is in line with our ongoing growth model targets. This was led by 12% operating profit growth at Taco Bell, a remarkable result given the significant investments we made in the fourth quarter to position the brand for continued momentum and category leadership for the years to come. Operating profit grew 8% in constant currency in China with impressive cost management partially offsetting weaker than originally expected sales results. We added more than 2,300 new units globally in 2015 and as I look forward out to 2016 to be a year of improved performance building on the fourth quarter's momentum. This year we expect to open nearly 2,400 new restaurants, which means we’re opening over six restaurants a day, laying the groundwork for future growth. With all of this in mind, we are reiterating the guidance we initially gave you in December. Given the results we have seen year-to-date and the plans we have laid out for each of the brands, we're confident in our ability to deliver 10% operating profit growth in constant currency in 2016. Now I'd like to discuss what gives me confidence in the future for each of our businesses. After that Pat will walk you through the financials. So first China, as I mentioned, KFC which represents about 75% of the division's operating profit grew same store sales 6% in the fourth quarter continuing the sequential improvement we saw throughout the year. System sales grew 9% in the quarter as we added 114 net new units, so crossing the 5,000 unit mark. I'm thrilled the China team is applying global best practices, fresh thinking and new insights to revitalize the brand and achieve attraction with consumers. Early test results of proven global sales volume package are encouraging and the implementation of this program should drive transactions and benefit the division later this year. One example is box meals which has proven successful globally and we expect to be similarly well received in China. I can assure you we are taking the right steps to grow the business and the momentum we are seeing makes me confident, we will. Pizza Hut Casual Dining in China which represents -- has represented about 25% of China's operating profit, has proven more challenging. System sales in constant-currency grew 4% in the fourth quarter, as we added 151 net new units, but same-store sales declined 8%. The macroeconomic environment and volatile stock market has impacted the Casual Dining segment and we know we have to generate more exciting news and value to counter this headwind. We'll be more focused on value going forward with work day lunch specials and value pieces as well as other initiatives to drive traffic. We have our work cut out for us here and we'll be moderating our redundant pace a bit this year. Nevertheless the China team has a number of strategies and concepts in test that we expect to improve results. We now have substantial run rate for new units and same store sales growth for China's leading western Casual Dining brands. Before I move on to the other divisions I want to give you a quick update on January sales in China. We are encouraged by what we are seeing at KFC, but Pizza Hut sales remain soft. It's difficult to gauge exactly where the first quarter will finish, especially given the earlier timing of Chinese New Year. But at this point we expect same-store sales growth to be up low-single digits for the division which sets us up well for the balance of the year. We expect solid KFC sales going forward and even with the potential of negative results at Pizza Hut Casual Dining in the first half we are reconfirming our full year guidance for the China division to generate same-store sales growth of 2% to 3%, operated profit growth of 10% in constant-currency and to open 600 new restaurants. Now turning to our three brand divisions, KFC is a franchise led emerging power house. Franchisees opened 85% of our 705 new international restaurants in 2015. Total system sales grew 11% in emerging markets for the year with particular strength in Russia and Central and Eastern Europe. In fact Russia has generated system sales growth of at least 40% in each of the last four years. I'm also encouraged by our recent performance in developed markets such as Australia, Japan and the United States. These results reinforce my confidence in the brand's ability to drive sales going forward. We don't only have an ability to generate meaningful growth in mature markets where we have a long established presence; we also have tremendous potential in emerging markets where we have a significant lead over the competition. So, we are taking our global brand identity and unifying that with local cultural insights to expand and grow our business pull around the world. We are 100% focused on our real, authentic and freshly prepared food and merging that with value and innovation to drive results. On the international front, we've enjoyed success with lunch and dinner box meals and we're delighted by the ideas created in the United States are finding their way into the system. For example we just introduced Nashville Hot in the U.S., this is a spicy version of our crispy chicken inspired by one of Nashville's most famous dishes. The New Year pipeline at KFC remains impressive. In KFC's top 12 emerging markets, excluding China, we only have one restaurant for a 1 million people. Today with an aggregate population of 3 billion people in these markets, think of the potential. Across the world we have plans in place to grow sales and to build on the division's consistent operating growth performance. I'm confident KFC will continue to excel and reward shareholders for years to come. At Pizza Hut U.S. we are starting to turn the corner with our focused emphasis on making it easier to get a better pizza. This runs the gamut from improved operations and insight driven food innovation to digital enhancements and consistent value. While we recognize there's a lot more work to do, we are now generating consistent public transactions and same-store sales growth in the United States. Equally significant and as you heard in December, we reached an important agreement with our U.S. franchisees. Starting in January we began overhaul of our assets replacing ovens and upgrading in-store technology. From a marketing calendar perspective we are focused on a balanced approach. This begins with premium product innovation such as our recent launch of Stuffed Garlic Knots Pizza to protect and improve unit level economics. You may also have seen the launch of our $5 Flavor Menu, the most compelling value menu in the pizza business. In conjunction with our ongoing $6.99 any pairs deal, it will provide our customers with great value on an ongoing basis. We are encouraged by the solid year at Pizza Hut in United States and we believe we have the right strategy going forward. Our international business at Pizza Hut is led by strength in emerging markets but offset by weakness in some of our developed markets. We believe we can apply best practices from the U.S. business to drive growth in these developed markets going forward. Finally Taco Bell delivered a fantastic 2015 surpassing $9 billion in system sales and we expect a solid year in 2016 as well. Taco Bell is on the cutting edge of QSR and it again received gold standard for social engagement, product development, brand positioning and advertising. We have several new exciting products launching this year including one we'll announce during the Super Bowl. So, be sure to watch the first half to see the national introduction. Our innovation focus extends beyond just food. We are encouraged by early results of our delivery program and our developing expansion plans for additional cities. The addition of our loyalty program in November built on our mobile app and will increase brand affinity as it rewards social behavior. So furthermore we are focused on our core value messaging to drive transactions. We continue to build on our breakfast daypart where sales are growing at twice the rate of our business as a whole, in fact we grew breakfast transactions 6% in the fourth quarter. Given the brand's strong economics and broad franchise appeal, we continue to accelerate New Year openings both domestically and internationally, with a record number of U.S. openings in 2015 and we expect to build upon this in 2016. I am particularly excited that we're starting to some traction, expanding the brands internationally. We know this process will take time but we're making real progress here. Our growth spends both domestically and internationally will lay the ground work for higher operating profit growth in the years to come. With all this progress you can see why I am very excited about what's happening in our company. We are underlying the biggest strategic move in the history of Yum! with our spin-off of the China business. We are confident this will create two large optimally structured independent companies with unique investment profiles. Yum! China will target 50% ongoing EPS growth as it focuses solely on Mainland China and will pay the new Yum! a 3% license fee. New Yum! will become a high margin global franchise company targeting 15% shareholder return. Recapitalization plans are underway and will be completed in the first half of this year. We see substantial value in our shares at common prices as we have repurchased 23 million shares from the announcement of the separation through last night. I want to assure you that while the spin-off transaction is critically important, we're not going to let it distract us from running the business in China or anywhere else. All three of our brands have significant opportunities for growth as they progress along the journey to brand excellence. We expect to achieve 10% constant currency growth and operating profit this year as a company and are setting up two separate companies that will lead the restaurant industry going forward. Yum! is in a unique position. We have three iconic brands and are making them even stronger. As you've heard me say before, my goal as CEO is to build three global iconic brands that people trust and champion. We are well on our way to achieving this, led by our brand positioning, courageous leadership and committed team members and franchisees. Needless to say there is lot to be excited about Yum! and I could not be more pleased to lead this company into its next stage. And finally as you all know this is Pat's last earnings call with Yum! and I'd like to take this opportunity to thank him for his leadership, his hard work and an unwavering drive to raise the bar of Yum!. He will be missed across the organization. As you may have seen in our 8-K filings we have appointed our current Corporate Controller, Dave Russell, as interim CFO and I look forward to working with him, while we complete our search for a permanent CFO. And with that, it gives me great pleasure to hand the call over to Pat.

Thank you, Greg, and good morning, everyone. In my remarks today I'll cover three areas; our fourth quarter results, our outlook for 2016, and an update on the separation of our China business. I too am pleased with the overall sales momentum that we demonstrated in the fourth quarter where EPS excluding special items grew 11%. Reported EPS growth was considerably higher as last year's fourth quarter included a non-cash special item charge related to the impairment of our Little Sheep concept in China. Excluding special items and the impact of foreign exchange, operating profit grew a healthy 17% in the fourth quarter led by system sales growth of 6% and restaurant margin improvement of over 3 percentage points. I'll now take you through our results by division, starting with our China business. For the division overall, same store sales grew 2% in the fourth quarter. As we pre-announced, KFC grew same store sales 6%, which was sequentially better than Q3 as we expected. We're encouraged by the positive momentum in our KFC China business particularly as it is sustained into the New Year. Same store sales at Pizza Hut Casual Dining however have remain sluggish and declined 8% in the fourth quarter. As Greg said, the China team is addressing this matter with urgency and we will update you on our progress through the year. Restaurant margin management continues to be a bright sport in China's performance. For the fourth quarter, China restaurant margins more than 4 percentage points versus prior year to 11.4%, helped by sales leverage at KFC and productivity improvements across the division more than offsetting sales to leverage at Pizza Hut. As a reminder, our fourth quarter is a seasonally low sales period for the China division, so the absolute restaurant margin tends to be lower at that time of year. Full year restaurant margin was 15.9% for the division an improvement of 1 full percentage point. It's not often that you see restaurant margins expand with declined sales, so this highlights the extent of the China team's efforts to improve profitability through cost controls. I am proud of the team's continued focus on productivity and confident this bodes well for further profit growth in China as same store sales continue to recover and unlock significant profit leverage in the business. Given our continued strong belief in China's long-term growth potential and encouraged by continued strong cash paybacks on new units, we opened 743 new restaurants in 2015. And while we're prudently dialing back the pace of the new unit development in 2016, targeting about 600 new restaurant openings, we also expect fewer closures this year. So our net new units will be similar to 2015. Our decision to temper the pace of development balances the reality of current market conditions with the opportunities we have to enter new trade zones and expand our presence in existing ones. We are also making good progress on modernizing our estate. In 2015, we remodeled about 500 restaurants in China, and we plan to remodel about another 550 in 2016. By the end of this year, we will have remodeled or newly built about 45% or nearly half of our China's estate in a three year period. Now moving to our global KFC division, which posted its eighth consecutive quarter of same store sales growth. System sales growth was especially strong in emerging markets up 10% led by Russia and Southeast Asia. International developed markets also delivered solid system sales growth up 6% led by Australia, Japan and Western Europe. And the U.S. recorded its sixth consecutive quarter of same store sales growth at 3%. Restaurant margins grew 90 basis points to 14.7% in the quarter and improved to 150 basis points for the year to nearly 15%. Operating profit grew 7% in the quarter before the impact of foreign currency translation. Adjusting this for the lap of a one-time favorable pension resolution as well as incremental advertising expense associated with our U.S. acceleration agreement, operating profit grew 11% in the quarter roughly in line with KFC's ongoing growth model. Importantly, KFC set another new record for international development in 2015 opening 705 new restaurants, demonstrating the power of this global iconic brand. Our global Pizza Hut division delivered 1% same store sales growth for the quarter led by 2% same store sales growth in our U.S. business, which accounts for about half of division system sales. Operating profit improved 6% in constant currency driven by higher franchise fees and higher restaurant margins, partially offset by an increase in U.S. G&A including severance and other one-time costs. Restaurant margins actually improved 240 basis points in constant currency for the quarter driven by same store sales leverage and commodity depletion. For the year Pizza Hut opened 429 new international units. While this was below our initial forecast for 2015, we now have a more robust development pipeline and are confident that we'll open at least 525 new international units in 2016. Finally, Taco Bell posted 4% same store sales growth in the quarter. Restaurant margin improved 3.1 percentage points to 23.7% raising full year margins to approximately 22%, a remarkable achievement for this power house brand. Operating profit however declined 7% in the fourth quarter due to an expected increase in G&A related to performance based incentive compensation, strategic growth investments including restaurant technology and international supply chain and other non-recurring costs. We believe these investments will strengthen the brand and help to sustain positive momentum in the business. As evidence of the one-time nature of these expenses, we actually expect Taco Bell's G&A will decline in 2016. Additionally, we expect restaurant margins to remain above 20%, even with our more aggressive push on value. On the development front, we opened 276 new stores in 2015. This included 41 units outside the U.S., four times the number we opened in 2014, demonstrating the progress we're making to ramp up international development. 87% of the division's new restaurants were opened by franchisees reflecting the attractive investment return the Taco Bell brand generates. I'd now like to talk about our 2016 outlook. Supported by the results we've seen year-to-date, we continue to expect to deliver operating profit growth of 10% in constant currency this year. And while I won't be providing quarterly guidance, I'd like to point out that certain brands are facing hurdles, both prior year laps and timing of current year expenses which will weigh on first half results. As a consequence we expect second half operating profit growth will be directionally stronger in the first half. This is consistent with our plans coming into the year and we remain confident we will achieve our full year operating profit guidance. Now I'd like to quickly cover our spin-off plans. We're making good progress and are on track to complete the separation of our China business by the end of this year. A major part of our plan is to optimize the capital structure of Yum! Brands and return $6.2 billion to shareholders prior to the separation to the issuance of new debt. From the time we announced the separation through last night, we've repurchased 23 million shares. While our weighted average basic share count for the quarter was 433 million, our basic share count as of February 2, 2016 was 411 million. We see value in repurchasing our shares in what we consider to be a discounted price and view this as a prudent use of shareholder capital. I'm also happy to report that we're on schedule to complete our recapitalization in the first half of the year, issuing incremental debt of approximately $5.2 billion and plan to maintain roughly 5 times EBITDA leverage going forward. We're now in the process of finalizing the form and timing of this financing. Now I'm sure you've noticed the volatility in the high-yield debt market particularly within the energy and materials sectors. We'll continue to watch this closely, but we're pleased that the rates on our future debt remains very attractive on a historic basis and we're coasting ahead with our plans. So, let me wrap things up, 2016 will be an exciting year for Yum! Brands. Not only do we expect to deliver 10% operating profit growth in constant currency, but we're proceeding as expected with the separation of our China division into an independent publicly traded company. Yum! China will have no external debt and will self fund growth capital, while generating significant free cash flow in year one and on an ongoing basis. The New Yum! will be a global diversified franchise company with an optimal capital structure. By 2017 we will be 96% franchised with a stable but fast growing free cash flow strength. I'm pleased I was able to participate in this landmark decision for the company and that we are optimizing shareholder value by creating two powerful investment opportunities. I'm very confident in both companies future growth prospects and look forward to their ongoing success. And with that I'll open the call to Q&A.

[Operator Instructions] Your first question comes from the line of John Glass from Morgan Stanley. Your line is open.

Pat first could I just follow-up on the question, comments you made about certain brands are facing certain hurdles in the first half. Well are these sales hurdles, profit hurdles, which brands, can you just directionally point us in the right direction so we can model in appropriately?

It is a combination of both sales and spending. Clearly in the case of Pizza Hut in China our expectations for the first half are more muted and we expect their sales recovery to improve in the back half of the year. So, that'll be around the first half results. At the same time we have spending in some of our global brand divisions that will be more heavily concentrated in the first half of the year and then in the second half of the year we'll be lapping some of the investments that were made in G&A and so that will contribute to the shape of earnings over the course of the year.

How much did Pizza Hut China impact the margins this quarter, in other words, is there real bifurcation occurring? I assume there is but maybe you can quantify how much the weight that Pizza Hut is placing on the margin for China? And also can you just talk about why not -- is this the moment you start developing Pizza Hut delivery more aggressively, since that seems like there's a huge untapped opportunity at the same there's some issues obviously with the dine-in business?

Yes, first with respect to margins in China, I'm not going to bifurcate by brands but it is fair to say and as you've seen from the comps that we've reported that the sales performance at Pizza Hut Casual Dining was not as strong as for KFC in China. And that's largely due to more significant transaction declines in that business and so did weigh more heavily on Pizza Hut China margins in particular. And then with respect to development you're absolutely right, it's early days for the Pizza delivery business in China and so we will be picking up pace development for that particular concept as we look to temper the pace of development of both KFC and Pizza Hut Casual Dining in 2016.

Your next question comes from the line of David Palmer from RBC Capital Markets. Your line is open.

Just a question on the role of value at Pizza Hut China, could you just give us perhaps a little bit of a retrospective and looking forward about what value you need for that brand? Did Pizza Hut China really get away from the five star dining at three star prices in recent years, making it more vulnerable now? And can you share what you brought out so far and the sort of value you might be thinking about for the brand and do you think that's going to enough to offset the casual dining weakness in the country? Thanks.

Sure, David. Well I think first of all, obviously the macros which have got worse since December, since we were all together in December and I think we all know that macros impact casual dining more than they impact QSR. So, I think there's definitely that issue. I would agree with you that we've not had enough value in use to overcome this backdrop. I think we've also as we've spoken out in previous calls, there is a lot of discussion around steak and fajitas and there wasn't as much discussion if you just think about around pizzas. And so I think our ability to talk value but to talk value around pizzas, I think you'll see more of that going forward. So, yes, the answer is we got to focus on the core to strengthen our brand positioning. We have got to target value to increase transactions such as smart value across daypart. We also have to I think improve our in-store experience in order to stay ahead with the competition. And I think the other thing we have got to be a leader in digital we got to say relevant. And I think there's a lot of things that we can do in that market as well. To I guess round out the answer, we've got about five value programs in test for Pizza Hut in China. We're going to see some early encouraging results but that's going to take us some time to get into the marketplace and as Pat I said I think you'll see a much better second half than you'll see first half out of Pizza Hut China.

Your next question comes from the line of Keith Siegner from UBS. Your line is open.

Two quick questions, sorry folks, the first one being when we look at the success of the three global brands particularly here in the U.S. in recent quarter on both sales and margins perspective, how should we think about that margin trajectory into this year? We've got easing costs, we've got very intense competition, how do we think about the margins for those three segments this year? And then to follow that up, can you give us an update on the plans to refranchise those three brands, the plan to go from 91% to 95% by the end of '17, how is that progressing? And maybe to be some extent how does the success of those brands recently impact that refranchising effort? Thanks.

Certainly, Keith. First in terms of margin performance in the three global brands, bear in mind our equity ownership in those three global brand businesses I think collectively is in the order of 10%, so it's a franchise driven business. But nonetheless we do focus on restaurant margins both for the benefit of our company as stated and importantly to ensure that our franchisees are realizing good returns on their investments. I would say overall we're pleased with the progress we're making on margins for our KFC global division to improve about 1 percentage point versus last year was quite a significant accomplishment, a combination of same store sales growth and productivity improvements contributing to that. At Pizza Hut equally happy with the progress we've made this year to your point supported by the commodity inflation as well as in the last quarter some sales growth. And then for Taco Bell another banner year with restaurant margins on a full year basis, we are on 22%. As we build on that momentum into next year, we are expecting our KFC and our Pizza Hut businesses to continue to realize margin improvement aided by same store sales leverage as well as more modest commodity outlook than we've seen in some years before. In the case of Taco Bell, my expectation is that margins will be up above 20% perhaps a bit below where they were in this year because of the more aggressive push on value and a more temperate approach to pricing. And then in terms of the refranchising, the teams are very much committed to realizing the objectives that we laid out to achieve 96% franchise ownership by the end of 2017. In the last 30 days Greg and I have met with each one of the global brand divisions to review their refranchising plans and their very discreet plans around specific geographies and pacing associated with that. Given the complexity of some these transactions, we would expect the refranchising activity will be more heavily concentrated in 2017.

Can I just add a point on the brands, just want to build on the point, Keith you asked. What I am really excited about, and I guess this is in Southeast Asia in January is that the positioning for the three global brands is really starting to be -- I am starting to see it on a global basis. So there is always original KFC whether it's this whole idea that we need to make it easier to get better at Pizza Hut and obviously a holding month at Taco Bell. I happened to be in Thailand, about less than two months after we sort of rolled out, need to make to easier to get better at Pizza Hut, I am in Bangkok and I am seeing really focused plans about what we have to do to get better and what we do to make it easy. So I think the thing I am really encouraged about is now that we have got this positioning clear for the three brands. It's the pace at which I am seeing that appear in the markets in 126 countries that we authorize that's giving me encouragement that we can continue to drive same store sales growth going forward.

The next question comes from the line of Diane Geissler from CLSA. Your line is open.

I just have a question on the new unit development and maybe just more a clarification. So when we think about the units that you're opening in China this year, can you give us a breakdown between KFC and Pizza Hut and then as the Pizza Hut slowdown just in your model is it temporary or is it more a shift from actual buying into delivery units?

Certainly, Diane. When we look at the 740 or so that we opened this year, about 350 were KFC, 280 at Pizza Casual Dining and the balance split between the Pizza Home Service and Little Sheep. When we look out to 2016 and our expectation of around 600 new unit openings, that’s about 20% reduction. That about 20% reduction applies almost equally to KFC and the Pizza Hut. So we're looking at deceleration in the pace of development for both KFC and for Pizza Hut Casual Dining. And we don't expect that, that is an indication of how things are going to play out much longer term. It's just that as I mentioned in my prepared remarks earlier, given current market conditions, we feel that it's prudent to dial back in that but we continue to be very confident in the value we will create from these investments as we're continuing to see cash payback to around three years and we know the long-term growth potential of the market remains significant. So we do expect that at some point in time the pace of development will increase for all brands.

I think the discussions that I have been having with Micky are really around, we still see 20,000 plus restaurants on the horizon as an opportunity. I think that we still believe in the growth story of China, the consuming class, the EPS, the economics not what they used to be but it's still better than most other places in the world. And I think as we get these brands fully positioned and we get back to doing the things that we've spoken about that we need to do. I think long-term we remain still committed that this is at least in what I'll call my horizon 20,000 restaurant unit opportunity for the China business.

Your next question comes from the line of Karen Holthouse from Goldman Sachs. Your line is open.

Hi, thank you for the question. You guys, I was surprised to see a tick down into your conference in emerging markets, at KFC and a little bit more material at Pizza Hut, particularly in light of commentary about strength in Russia, strength in Eastern Europe. I am curious if there is any particular regions of the world you would point to that are causing a little bit of softness there and what might be causing that?

Karen, what I'd highlight for both KFC and for Pizza Hut in terms of the emerging markets which remain strong overall given what we're seeing by way of system sales growth is that the same store sales growth has probably been a bit below our expectations for some of the emerging markets in South East Asia.

All right, thank you.

Your next question comes from the line of Jeffrey Bernstein from Barclays. Your line is open.

Thank you very much. Actually just two restaurant margin questions. One in China, Pat, I think you said for this full year it was 59 plus 100 basis points and that was quite impressive considering the sales decline. As we think about 2016 and you talk about 2% to 3% comp growth, I'm wondering, why perhaps the guidance? I think you've mentioned in the past maybe 15% plus margin in '16. Wondering why it wouldn't be significantly higher if presumably due to those positive comps? And maybe you can offer some food and labor commentary. And a similar question on Taco Bell, I mean Keith said right, greater than 20% margin in '16 but down from '15 it sounds like there is a big value push perhaps coming. So I'm wondering, if you guys can just talk a little about the category, with a little bit discounting going on seems to have intensified of late and where Taco Bell is well positioned to respond to that. Thanks.

Certainly, and we'll start with China. We finished the year from a margin perspective in China stronger than we'd expected. And so our current expectation is that margins in 2016 will be about in line with 2015, so around 16%. As you mentioned we're expecting to realize some benefit from same store sales growth but we're taking I'd say a more tempered approach to pricing, given the focus on value as the team's emphasis is on building transactions, building healthy transactions. And so that may mean that we wouldn't take pricing that we might have in the past to fully offset inflation and we'll be much happier with an outcome where we'd build transactions with that margin, as opposed to growing margins. And so that's the outlook for China. As it relates to Taco Bell, I'd say things are a little bit similar in the sense that the emphasis will be on value to build on a great momentum we had in 2015. We are expecting modest inflation I'd say probably more than we've realized historically in the labor category for our company stores. We're anticipating there could be some movement in wage rates and I'd say modest outlook on commodity inflation for the Taco Bell business.

Just let me talk to about whole question about value, I think the great thing is that Taco Bell is incredibly well positioned, it remains the value leader. But look, we've all seen what's been happening in the marketplace in the early year: five for $4, four for $4, two for $2, so let's not kid ourselves. So, there's been a fair amount of value initially out there. So as you would expect from a well positioned brand, they are back looking at the calendar, I think you'll see some changes that will come out. Obviously they have got this great new product launch coming out on Sunday, so I think that will have a positive impact on the brand. They will do the right thing and I'll make sure that they continue to be well positioned in the value leader in the marketplace going forward that's what you should expect great brands to do.

Great, thank you.

Your next question comes from the line of Brian Bittner from Oppenheimer. Your line is open.

Thanks, guys. I've two questions, first is on China, kind of following up. In the fourth quarter you did have great margin leverage again and operating profit growth of almost 200% on a 2% comp and you're expecting similar comps going forward as you had in the fourth quarter. So can you just talk again a little bit more about what investments are being made in China that are going to keep the margin and profit growth more in check as your guidance kind of suggests? And then I do have a follow up.

Well, first in terms of China margin for 2016, as I mentioned there will be much stronger emphasis on value in order to simulate traffic and as a consequence we're not necessarily expecting that pricing will fully offset inflation. What we're expecting by way of inflation in 2016 is about 1% for food and high single-digits for labor, but again we're not expecting to fully offset that to pricing, as maybe has been our past practice, as the team is refocusing on building transactions. We're counting on continued productivity improvements probably not the heroic improvements that we've seen in years past. If we do better than 2% to 3% comps in 2016, we would expect margins to improve but we're not planning for that right now. The other variable though is labor efficiency, because the team let's face it has consistently surprised us to the upside and that could provide further tailwind to China margins in 2016. We think at this stage guiding about flat margins year-over-year, is appropriate.

That make sense. And then the second question just on the pending recap that you expect to be completed here in the first half. You said at the Investor Day that you are targeting 5.25% blended interest rate, is that still an achievable targeted rate as you stand here today?

Yes, Brian. It's Larry Gathof. As Pat mentioned, the markets have been very volatile and spreads definitely have widened across the market. That said, there's a lot of bifurcation in the market. The good credits are still getting done at fairly good and attractive rates, especially on historic basis. So it really depends on exactly what we execute and we're evaluating and doing some specifics around both the tenure of the debt and the types of the debt we've put out there. So the 5.25% I would say was still in the game, but it's probably 5.25% or plus, not on the lower end of that at this point.

And Brian, that 5.25% that we referenced was for the entire debt portfolio of Yum!, not just the incremental debt. So just wanted to make that clear.

Your next question comes from the line of John Ivankoe from JPMorgan. Your line is open.

A question on China margins. Obviously you guys were happy with margins, given the comps in 2015. You were happy with the levels in the fourth quarter as well. But the question that has to continue to be asked and certainly we've been asking it for the last couple of years; to what extent that attention to cost controls, labor efficiency, other OpEx efficiency, what have you, has actually in some way contributed to the lack of traffic recovery that you guys have consistently expected? So I just want to see whatever research or information, anything qualitative, quantitative that you may have to make everyone comfortable that you haven't gone too far. And in that context, is some of the guidance on China margins in 2016 an admission that there are no more structural cost cuts or tactical cost cuts that exist within the China system and that margins are really now going to be a function of comps?

Let me just start with that one. I will take that. I think the -- certainly the customer metrics -- certainly on KFC, the customer metrics are now back pre the incident, so I think it doesn't matter what metrics you look at. I would say all of those metrics are obviously way back. In an absolute sense, the Pizza Hut metrics are actually higher than the KFC metrics. Probably haven't regained as much momentum, but they are in an absolute sense higher. I think the other thing, just to address your question, is there's a lot of work being done on menu simplification as well. And so I think what we've got to do is, obviously besides looking at labor and other costs that go into it, is how do we simplify the menu so that we make it easier for the customer to speed up the experience? In KFC's case or in Pizza Hut's case, I think, you know, really deliver the best casual dining in-store experience in order to stay ahead. So there's a number of initiatives around simplified menu boards, box meals make it actually easier for the customer to order rather than standing in queue and lining up. So we're spending a lot of time making sure that the margin improvements do not impact the customer experience. And all of the evidence that I can see suggests that there is no impact on the customer experience. And Micky has the bit between the teeth on improving the speed of service, particularly in KFC. And there's a number of initiatives in place that I think will actually enhance that experience, enhance throughput, and obviously lead to sales and transaction growth.

And John, what I would add to what Greg has said is that we continue to believe that long term, 20% is an appropriate margin target for the China business. And you have to think about that in the context of where average unit volumes are today and where we know they can go. We're not putting a time frame on it, but we know that there is enormous profit leverage in the business, given all the productivity gains that have been made in the last two to three years. And that as the same-store sales continue to recover, we will see significant margin improvement. To your point, that is from comps, but I also wouldn't underestimate the opportunity for the China team to continue to realize some structural improvements in the business. They've consistently delivered well beyond our expectations. They have enormous capability, and I think that the next leg of productivity improvement in the restaurants will be unlocked by technology. And it's fair to say that the digital capabilities of our China business are the best that we have in our entire company. We are all very excited about how that's going to transform the customer experience and that will unlock further productivity opportunity in our restaurants and contribute to that improving margin over time.

Your next question comes from the line of David Tarantino from Robert W. Baird. Your line is open.

My question is on the Pizza Hut business in China. And I know this might be hard question to answer, but I was wondering, if there is any way you can dissect how much of the comps weakness you've seen recently is more related to macro issues versus internal issues? And I guess said differently, is there any benchmarks within that market that you're looking at that would say you are underperforming or over performing relative to the industry there? And then I have a follow-up.

Okay, David, let me take one. We don't have obviously the sort of information we have in the U.S. We don't have credit and MPD data to try and get to the specifics that you're asking. I think we all know -- and we've seen this not just in China, but outside that casual dining is impacted by macros. It's just what happens. And it always has a bigger impact on casual dining when macros are volatile and changing than it does on the QSR business. So if I were to say what are the four factors, I would say macros. I think the second one would be not having enough value news in order to overcome this sort of macro backdrop, which is why we've got a number of macro tests in the marketplace right now. And obviously with a sense of urgency, we need to get these tests into the marketplace. I think there is definitely competition. There's definitely more competition in the marketplace. I don't think a lot of this competition is going to try and scale up on the broad scale like Pizza Hut is. And then I think that the last thing or the last point or factor I think would be aggregators, but that's a small percentage of total sales. So I would say it's macro, it's value, it's competition, and it's aggregators. That would be -- I can't put a percentage on for you. I know you would like it, but those would be the four factors. And that's why our response has to be focus on the core to strengthen the brand positioning, target value increased transactions, deliver the best in-store dining experience. And then leading digital, as Pat said, whether it's free Wi-Fi, queue ticketing, pre-ordering, and then partnerships with people like Alipay and WeChat to drive cashless payment as well as the loyalty program. So that's the things we're doing in response to the four things we see driving the performance we're not happy with in Pizza Hut China.

Great. And I guess the follow-up to that -- that's very helpful. But the follow-up is if it ends up being mostly macro, it seems like you are swimming into a pretty stiff current on some of this. How much contingency have you built into the plans, if the Pizza Hut business doesn't stabilize as you expect in the second half?

Well, I think there's two things. First of all, we do have a number of tests, so I don't want anyone to go away thinking that we haven't developed a number of test scenarios. Now, I think the difference between KFC and Pizza Hut is, in KFC we can draw on proven ideas from the other 100 countries we've got KFC. There's less opportunity to do that, but I can assure you that Micky and the team are really focused on what I would call these value platforms being tested and obviously what we're trying to resolve the impacts. We need to see positive sales impacts and I think some of the early day test results suggest we're seeing sales impacts in these tests somewhere between plus 1% to plus 7%. So we've still got a long way to go. We've got to get them into the real world, but I am at least optimistic with what I'm seeing in the tests. But this is a hard slog. This is definitely a lot harder than KFC in China. We're going to have to work really hard, but we've got the right team in order to come up with the right ideas to overcome all the values that even macros or competitors put in our way.

Your next question comes from the line of Karen Short from Deutsche Bank. Your line is open.

So a couple questions on Pizza Hut. I guess your U.S. comp seemed to come in at the low end of expectations, at least as you stated at your December Analyst Day and international is a little uninspiring. So first question is any color as to why? And then I guess two related questions would be, you outlined the path to achieving a 3% comp at Pizza Hut at the Analyst Day with various initiatives, but it seems a little optimistic on a blended basis. And then the last portion of the question is there any way to accelerate the common POS conversion? Because it seems like one common system might really be the backbone that you would need before comps can really re-accelerate. Thanks.

Let me start with the U.S. comps. I mean, they were plus 2%; it was our best quarter in three years. And I agree, it doesn't -- it sort of pales with the KFC two-year conservate and talk about a 10%, but it was our best quarter in three years. And as I indicated in my prepared remarks, I'm very encouraged by the start for 2016 for Pizza Hut. And what I'm encouraged about is how rapidly this whole idea of we need to make it easier to get better is going around the world. I know that in the past if I had turned up in Bangkok two months after we came up with an insight of easy beats better, I probably would not have seen that being impacted or reflected in the work either to make us better or make this easier. So I'm encouraged by the start for Pizza Hut in 2016. I have confidence that you will see us deliver sequential improvement in same-store sales this quarter versus the fourth quarter. And every journey has to start somewhere and I think that journey started in the fourth quarter of 2015. And then I am encouraged by how rapidly we are taking this idea and seeing it now being impacted and addressed by all of our teams around the world.

And then, Karen, as to your question regarding the common POS, the team estimates it will take a couple of years to migrate all of the restaurants in the U.S. to a common platform. So they are targeting end of 2017 to accomplish that. It is a high priority, but given the extent of integration between those different POS systems and back-of-house and other applications, it will take some time in order to do it properly and minimize disruption to our business.

The next question comes from the line of Jason West from Credit Suisse. Your line is open.

Just two separate questions. One, can you breakout in the China comp for the quarter kind of where you are on pricing and then I guess if mix was meaningful there as well? And then separately, Pat, now that we are a little closer to the leverage event, do you have any updates on how you're thinking about use of proceeds? Would you lean more on an accelerated share repurchase or are you also considering a special dividend or more of a gradual buyback? Thanks.

Certainly. In terms of the China comp for the fourth quarter, the 2% increase reflected a 4% benefit from pricing and then we also had a positive benefit or impact of mix -- sales mix, and then that was offset by some transaction decline in getting to the 2% comp. With respect to our leverage event and use of proceeds, as you know, a lot of it comes down to valuation and where things are at, at the time. So it's early to say exactly how we're going to be returning the cash.

Your next question comes from the line of Andrew Charles from Cowen and Company. Your line is open.

Pat, just a quick housekeeping, if you can give us the puts and takes on China margins this quarter. And then separately, as China food costs continue to be quite favorable, I know there's a little bit of inflation for next year as well as some more resilient pricing. Should we expect you to sacrifice this favorability for traffic in order to more aggressively pursue value in 2016, both China brands, relative to the promotions you ran in 4Q?

Okay, Andrew. First in terms of the drivers of Q4 margin, we were very pleased with the performance in the quarter. Margins were up versus prior year about 4.5 percentage points, and here's how it breaks down. When you take the 4% pricing, add to it the mix benefit, and strip off the impact of the transaction decline, that's about a net 2 point benefit. On top of that, we had a 3 point benefit from productivity, and another 1 point benefit from closed stores. Offsetting that was a 1.5 margin attributable to inflation. Commodities were flat, but we had 6% inflation on labor. And so that's basically the lock to the 4.5 point gain in margin versus prior year. In terms of how we are thinking about 2016, as I mentioned before, the team is very much focused on building transactions. So while we do expect some modest inflation from a commodity perspective, up about 1% and high single digits for labor, we're not planning to take pricing to entirely offset that. We will look to some ongoing productivity improvements to help mitigate the impact of inflation. But the goal is to at least maintain margin year-over-year at around 16% and to achieve meaningful improvement in transactions.

So essentially, food costs should be flat then within that construct?

Andrew, we thought it would be about 1 point of inflation from a commodity standpoint for the year, if you're asking about 2016. Between flat and 1 point.

Your next question comes from the line of Jeff Farmer from Wells Fargo. Your line is open.

Just a single follow-up on a handful of earlier questions. So I believe it was at your December Analyst Meeting you noted that Pizza Hut Casual Dining is listed with several of the online aggregators. I think you said the sales mix coming from those channels is something less than 5% mix. I'm just curious: do you expect that sales mix to grow? And then more broadly and more importantly, what's the longer-term strategy with those aggregators as you move forward and they potentially become a little bit more powerful?

Jeff, I think to answer your question, they are still low with the percentage of the sales mix. I think in Q4 I think at KFC, they were about 2% of total sales. I think Pizza Hut Casual Dining was about 2% of total sales. I think Pizza Hut other service was about 30% of total sales, but obviously that's a small part of the pizza business. Yes, we are obviously working with these aggregators and we continue to participate with them. I think -- I would like to say they are now turned, so we don't lose the customer data or erode our brands in that process. So I think that's the critical part of the relationship is that the aggregators like working with big brands like us and we like obviously not -- making sure we keep our customer data and we make sure that we keep our plan positioning really clear in this marketplace.

And just one final question in terms of just gauging momentum. I know it's hard to do across multiple concepts, but is this still building or are you getting to sort of a tipping point where maybe it's got about as far as -- gone about as far as it is going to go and then it maybe it sort of settles back down as we get deeper into 2016 or 2017? Or again, really is this still continuing to be a building competitive issue as you move forward?

Do you mean aggregators?

Yes.

Yes. Look, I think, as I said, of the four factors that are impacting our business, when I spoke about earlier, I think for Pizza Hut, which were; macros, value, competition, and aggregators. I think they are the fourth. I think they will probably stay the fourth. I think our ability to deliver new value news in the marketplace will be a much greater driver of our improved performance than I see much growth with that. But it will continue to grow. There is no -- I'm not suggesting it won't continue to grow, but I think that because we have strong brands and the aggregators want to work with us as strong brands. I think that puts us in a more driver's seat in terms of how we play with them versus the small guys, who I think the aggregators will have different terms and arrangements with. So I feel good about where we are. I can tell you that the China team is all over it. Micky is very well versed. He's definitely met with the aggregators personally, so we're watching this. It will grow. But I think in that growth and value will be in the short term more important for us to address.

Your last question comes from the line of R.J. Hottovy from Morningstar. Your line is open. R.J. Hottovy: Had a technology question. During the prepared remarks, you said you were pleased with the level of mobile engagement at the Taco Bell brand and the deliveries that may come out of that. I just wonder, if you had any additional color on that and kind of the quantitative measures that we might be able to look at? And then secondly, any kind of takeaways or learnings you can apply to either the rest of the U.S. or even potentially on a global basis from those technology endeavors?

Yes, I would say that we are very pleased with the progress we're making on the digital front at Taco Bell. You'll recall that we launched our Taco Bell app in the fourth quarter of 2014. To-date, we have about 5 million app downloads. When we look at the behavior of those customers who are ordering through the app, the average check is higher by about 30%. So we're very much encouraged by those early results. We are looking to build awareness of the app to drive utilization. And an important part of that is the introduction of a loyalty component to the app, a game. That was launched in late 2015. It's the first loyalty program of its kind that rewards social behavior and the first reward that was offered for customers who play the game was a free Taco Bell Freeze. So there is a lot of excitement around that. The app is also configured in a way that drives exploration of the menu. So it has helped to create a lot of buzz and a lot of active engagement with our heavy users, very high levels of social sharing of the rewards we've observed and the overall user response has been very positive. So the focus now is having launched the app and more recently, the loyalty program is to drive awareness. And so we do expect to see even greater trial in the coming months. The goal is, you know, for Taco Bell is to strengthen its position as an on-demand brand and so leveraging technology to do that is an important part of the brand's priority going forward.

What I really love about it is the customization that is going on. We recently just got certified by the American Vegetarian Association for Taco Bell. And we can highlight that -- we probably can't run an ad on TV to highlight that, but using the app, we can. And it's really interesting to see that we are actually getting people customized out of beef and into beans as a protein. And from a margin point of view, that's really good for us. But it also makes the customer happy. So what I love is that we can use the mobile app as a vehicle to actually talk a more discreet story about the brand. It's a great story, it's a good story, but it's something we wouldn't traditionally do on mainstream TV. But we can use this to get that message out, and that's making the brand more relevant. And making any brand more relevant is the name of the game. A - Steve Schmitt Thanks, R.J. Okay two more questions.

Your next question comes from the line of Paul Westra from Stifel. Your line is open.

Two quick ones. One more on China. I was wondering, if you could give us general sales trends update on maybe where you saw some weaknesses or some strength by tiers or geographies or perhaps locations? And then second on Taco Bell. Was wondering, if you could give us a little bit more color on those G&A investments. What were they exactly? Can you confirm that the majority of the year-over-year spike in G&A at Taco Bell was of one-time nature, which you alluded to?

Certainly, Paul. So first on China same-store sales, similar to recent quarters, performance was stronger in Tier 1 cities at both brands. Our view is that customers in lower tier cities have been more significantly impacted by the softening economy, particularly around the industrial cities, which have been more heavily affected by China's slowing export trade. But that's the only meaningful difference really to call out. And then as it relates to Taco Bell's G&A, as we mentioned, the increase in the fourth quarter was expected and it's fair to characterize a large chunk of the incremental G&A as being nonrecurring. So some components would include performance-driven incentive compensation, because they had an absolute blockbuster year, and so they were paid accordingly. We plan for a 100% payout, so that contributes to a year-over-year decline as we think about 2016. There were some investments that were made and some strategic growth initiatives that would highlight international supply chain development. I would also highlight the digital initiatives, like the ones we just talked about. And so that contributed to a spike in the fourth quarter. And importantly, we think about those as investments to sustain the positive momentum of the brand. I think good businesses that are strong performing businesses reinvest profit upside to sustain the momentum and that's exactly what's happened at Taco Bell.

The way I look at it, look the new plants that you -- trees that you plant and the ones that are growing both need water. You just can't throw water on the new plants. You got to throw water on the big strong trees to make sure they continue to be big, strong, and keep going. And that's what I saw in that investment in the fourth quarter. I'm glad we made it. I'm delighted we made it. It was the right thing to do, and you are going to see that in the performance of Taco Bell going forward.

Your last question comes from the line of Joseph Buckley from Bank of America. Your line is open.

Thanks for squeezing me in. Two more questions on Pizza Hut China. First, you mentioned the smaller tier markets being hit harder by the macro. The Pizza Hut expansion numbers the last three or four years have been pretty aggressive, and have you extended the brand into areas where the economic development did not follow or are there cannibalization issues behind Pizza Hut? And then secondly in Pizza Hut, I know you mentioned a 20% reduction in expansion will be across both brands. But within Pizza Hut, how will that break down in financial plans for 2016 between home delivery and casual dining?

Yes, for -- first of all, I will address your last question first, Joe, and that is that the slowdown in development for the Pizza Hut brand is only for the casual dining business, not for the delivery business. And then as it relates to the performance of Pizza Hut across cities, I would not attribute variable performance to development decisions and higher than expected cannibalization necessarily. It would be more a function of variable levels of macro pressure across these cities.

Okay. And Pat just to follow-up then. So the Casual Dining Pizza Hut expansion would be down much more than 20%, with the difference made up by faster home delivery? And what about the sales volume differences there in terms of trying to figure out the growth?

No Joe, the 20% -- the approximately 20% applies exclusively to the casual dining business. That's not a composite number for both businesses under the Pizza Hut banner.

Okay. But it's 20% for both KFC and Pizza Hut or are they both…

For KFC and for Pizza Hut Casual Dining. We are not slowing down the development of Pizza Hut home service.

Okay. Will that accelerate the latter?

We are expecting it to be at least as much as we developed in 2015.

Okay. Okay, thank you. Thanks for squeezing me in.

Okay. Well, I think that wraps it up. I want to thank everyone for being on the call today. Thank you for taking the time to be with us. And I know I've said this as well, but I do want to thank Pat. Pat joined Yum! at Taco Bell when I was the CMO and he was the Head of Strategic Planning. He has been a true friend. He has been a great resource. He has been a great leader, and I want to thank him. And I want to wish he and his family all the very best for the future. Thanks. Thanks everybody.

This concludes today's conference call. You may now disconnect.