Donny Lau - Senior Director, IR & Corporate Strategy Greg Creed - CEO David Gibbs - CFO Micky Pant - CEO, China Division

Joseph Buckley - Bank of America Merrill Lynch John Ivankoe - JPMorgan Eric Gonzalez - RBC Capital Markets John Glass - Morgan Stanley Brian Bittner – Oppenheimer Sara Senatore - Bernstein David Tarantino - Robert W. Baird Karen Holthouse - Goldman Sachs Jeffrey Bernstein - Barclays Capital Andrew Charles - Cowen Dennis Geiger - UBS

Good morning. My name is Heidi and I will be your conference operator today. At this time I would like to welcome everyone to the YUM! Brands Second Quarter 2016 Earnings Conference Call. [Operator Instructions] Donny Lau, Senior Director of Investor Relations and Corporate Strategy, you may begin your conference.

Thanks, Heidi. Good morning, everyone and thank you for joining us. On our call today are Greg Creed, our CEO and David Gibbs, our CFO. Also on today's call is Larry Gathof, YUM!'s Treasurer and we're very pleased to have Micky Pant, YUM! China's CEO as well. Following remarks from Greg and David, we will open the call to questions for the entire team. Please keep in mind Micky is dialing in from Shanghai so there could be a slight delay in some of his responses. 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 uncertainty and could cause our actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to the investor section of the YUM! Brands website, www.yum.com, to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call. We're 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 any future use of the recording. We would like to make you aware of the following upcoming Yum! investor events. Third quarter 2016 earnings will be released on Wednesday, October 5. Our 2016 Investor and Analyst Conference will be on Tuesday, October 11 in Midtown Manhattan. Now I'd like to turn the call over to Mr. Greg Creed.

Thank you, Donny and good morning everyone. Yum! Brands delivered second quarter core operating profit growth of 7% and EPS growth, excluding special items of 9%. Given our strong first-half results and current trends in China, I'm pleased to raise our full-year core operating profit growth forecast to at least 14% from 12% previously. I'm particularly pleased with the continued sales momentum at KFC China which delivered better-than-expected same-store sales growth of 3%. This represents our fourth consecutive quarter of positive same-store sales growth at KFC China despite the second quarter being our most difficult of the year from a historical sales overlap standpoint. Importantly, our China Division is off to a good start in the third quarter for both KFC and Pizza Hut Casual Dining, including a return to positive same-store sales at Pizza Hut Casual Dining in recent weeks. Outside of China, challenging industry conditions in the U.S. contributed to soft sales results. However, our three brand divisions in the aggregate delivered core operating profit growth largely in line with our expectations and remain on track to deliver against their full-year core operating profit growth targets. We're confident in our plans to drive second-half sales improvement led by a continuous focus on innovation, value and our core products. This is a transformational year for our Company as we remain on track to finalize the separation of our China business with a targeted completion date around October 31, 2016, ultimately creating two powerful independent focus-growth companies. Our capital structure is fully in place and we plan to return a significant amount of capital to shareholders both prior to and after the spin. And I look forward to sharing additional details on the transformative initiatives we're undertaking as we become a more heavily franchised Company at our New York investor conference on Tuesday, October 11. Today I will give you an overview of each of our operating divisions and then David Gibbs, our CFO, will walk you through the financials. After that the team and I will be happy to take any questions you might have. So first, China, as I mentioned, I'm particularly pleased KFC which represents about 75% of our operating profit in China, reported its fourth consecutive quarter of positive same-store sales growth with 3% comps in the second quarter. This was driven by stronger results in the second half of the quarter as our bucket-related promotions resonated with consumers. It's great to see the team's focus on the core end value translating into tangible results. Furthermore, we've simplified menus, improved efficiency and conveyed our value proposition to customers all the while maintaining our consumer perception scores. In fact, we've done all this while simultaneously improving restaurant margins in each of the last four quarters versus prior year. I'm also encouraged by KFC China's plans for the balance of the year and am pleased to report our third quarter which began June 1 and is historically our highest from a profitability standpoint, is off to a great start with same-store sales results quarter to date up low double digits. We rolled out Box Meals in June and are currently promoting our historically successful wing bucket which we pulled forward a week earlier this year. As you all know, Box Meals have proven effective globally for KFC and we expect success in China given test results. It's great to see knowhow sharing across our global knowledge base and we look forward to leveraging this on an ongoing basis across all of Yum!. At Pizza Hut Casual Dining, system sales declined 2% and same-store sales declined 11% in the quarter. The good news is based on our third quarter results to date, it appears the China team's strategic initiatives are beginning to bear fruit. As evidence, quarter-to-date same-store sales are slightly negative and I'm pleased to report they have turned positive in recent weeks. Our renewed focus on pizza and ensuring customers understand our value proposition are critical to brand success. It's too early to declare victory but we know the potential of this brand and are further enhancing our core, simplifying the menu and leveraging ideas from Indonesia and Hong Kong, where we have other successful casual dining concepts to execute on our strategy. Overall we're clearly pleased with the progress we're making in China and our third quarter results to date. We caution overlaps do get tougher though for the balance of the quarter. So now onto our three branded divisions, in our KFC Division, same-store sales grew 2% in the second quarter or 4% on a two-year stack. Operating profit grew 6% in the quarter and the division opened 132 new international restaurants in 42 countries. 88% of these units were opened by franchisees and 68% of our new international openings were in emerging markets. I'm encouraged by our ability to generate growth in both emerging and developed markets, as I think this really speaks to the global strength of our brand. In the U.S. for example, we reported our eighth consecutive quarter of same-store sales growth. As further evidence we're gaining traction with our strategy in the U.S., our two-year same-store sales growth lapped 3% growth in the prior year, so on a two-year basis, comps were plus 5%. System sales in international developed markets grew 4% and in international emerging markets grew 10%. We remain on track to open at least 475 net new international restaurants this year and the U.S. is committed to delivering about 1000 remodels in 2016. After the spinoff of our China Division, KFC will be the largest contributor to new Yum! from multiple perspectives including absolute profit growth, restaurant count and profit growth to name a few what really excites me are all the opportunities for growth that exist for this brand. Today we open approximately three new KFCs a day globally or one every 8 hours, we're on a path over time to open one every 5 hours which would nearly double our annual new unit openings. Pizza Hut had flat same-store sales in the quarter with 1% same-store sales growth in the U.S. which makes up approximately 60% of total sales. While second quarter results in the U.S. were softer than expected as competitors responded to our first quarter success with more aggressive promotions, we're pleased to see transaction growth in the U.S. and a continuation of the positive sales trends in our U.S. business. We believe our focus on making it easier to get a better pizza, whether it be by providing consistent value through the $5 Flavor Menu and $6.99 ANY Medium Pairs Deal or by improvements in technology as we upgrade our web experience and migrate our system to one POS will continue to enhance our business model. As a testament to our strategy, our Company-owned stores which are executing against a comprehensive suite of easy and better initiatives including a locally competitive value message driven by data science that is complementary to the national message and new operations programs geared to accelerate improvements in customer satisfaction, delivered second quarter same-store sales growth higher than the system with transaction growth more than five percentage points higher. This Company outperformance is obviously encouraging as it is a clear indication that we're on the right track and we're excited about the impact these initiatives will ultimately have on the entire Pizza Hut system. Our international business at Pizza Hut saw system sales growth of 3% in constant currency and a 1% decline in same-store sales in the quarter. Sales were strong in Thailand, Canada and the UK but offset by weaknesses in Korea. Last quarter I mentioned that we were planning on rolling out proven, successful tactics in the U.S. in international markets. I'm pleased to say that we have started this and are seeing success with the $5 Flavor Menu in Australia and other markets and have plans to roll this construct out to additional markets later this year. This gives us confidence that the international Pizza Hut business is not far behind the U.S. in its turnaround. And finally, Taco Bell, operating profit grew 1% when adjusting for the impact of refranchise and this was after lapping a plus 29% from the prior year. However, U.S. same-store sales declined 1% as we left a plus 6% from the prior year. While a plus 5% on a two-year stack is ahead of the category, we expect more out of Taco Bell given the strength of this brand. In the current environment, we need to pair innovation with value that clearly resonates with our consumers. For example, our $5 Cravings Deal bundle improved results toward the end of the second quarter and through the first five weeks of the third quarter, same-store sales are positive. We believe that the Taco Bell brand is extremely well-positioned to exceed in a challenging environment. In market research, Taco Bell always ranks as one of the top brands in providing value and innovation to consumers. We plan to leverage this decisioning in the balance of 2016 and going forward. Furthermore, we remain on plan with new unit development for the year. We're accelerating international new unit openings and are excited to see momentum behind this strategic objective. While it is early days, we believe this could be a meaningful driver of long term growth and look forward to continued progress. Now before I turn it over to David Gibbs, I just wanted to share with you some of the highlights from our recent biannual franchise convention that was held this year in Las Vegas. I think it's fair to say our franchisees are extremely bullish about the transformation we're undergoing at Yum! as evidenced by a record 1100 attendees representing over 100 countries, including numerous participants from our China Division. This showcased the power of Yum! at its finest as we brought all three brands together to build and share know-how on development, advertising, innovation, value and digital. We're on a clear path to become a world-class franchisor and an even sharper brand builder. So as I said, 2016 is truly a transformational year for Yum!. We're confident we will deliver at least 14% core operating profit growth and I'm pleased with the momentum in our China business as we near completion of the China separation. The Yum! China team is excited to reap the benefits of a continued growth in the consuming class and as an independent Company, Yum! China will continue to unlock massive growth opportunities while further capitalizing on what remains the number one retail opportunity in the world. At new Yum!, I couldn't be more excited about the plans we have to become an even more unique and more powerful world-class franchisor. We will not undergo an evolution from Yum! as you know it but instead another transformation as we increase our franchise mix to at least 96% by the end of 2017 and sharpen our focus on four key areas, brand building, franchisee capability, market and asset development and our unique culture. We will make all decisions based on this construct. We will transform our mindset from equity-led to franchise-led and commit to a cost structure that enables us to build on these pillars. And I look forward to sharing additional details of this transformed vision for new Yum! at our investor conference in October. And with that, I will hand it over to David Gibbs.

Thank you, Greg and good morning, everyone. In my remarks today I will cover three areas, our second quarter operating results, our outlook for 2016 and an update on our recapitalization and the separation of our China business. Let's start with a high-level overview of our second quarter performance. Yum! Brands delivered core operating profit growth of 7% in the quarter. Our China Division reported flat same-store sales growth despite it being our toughest compare of the year. As Greg said, we're pleased with the progress we're making in China and with sales results to date in the third quarter which is historically the biggest quarter of the year from a profitability standpoint. Second quarter core operating profit in our China Division grew 6% and was impacted, as expected, by an additional $14 million enclosures and impairment expense versus prior year as well as a $4 million expense related to our RGM convention. These expenses were partially offset by a benefit from recent value added tax reform in China which went into effect on May 1 and positively impacted restaurant margins in the second quarter. In aggregate, our three brand divisions delivered 3% core operating profit growth in the quarter. This was led by 7% growth at Pizza Hut and 6% growth at KFC partially offset by soft results at Taco Bell. Overall, EPS before special items grew 9% including a 4 point negative impact from foreign currency changes. The EPS benefited from a 6% reduction in our diluted share count compared to our second quarter last year due to our significant share buybacks over the past 12 months. Now I would like to discuss our 2016 outlook. Given our strong first-half performance and current trends in China, we're raising our core operating profit growth forecast for Yum! from 12% to at least 14% including the 53rd week. We started the year by saying that we expected Yum! core operating profit growth of at least 10%. Outside of China, our three brand divisions remain on track to deliver results consistent with our initial targets. Therefore, the increase in Yum!'s 2016 guidance is essentially due to upside in China including strong year-to-date KFC sales, margin and profit growth and a balance of the year that will be aided by the VAT change partially offset by a return to commodity inflation and higher labor costs. As you might recall, last quarter we walked through the pending changes to China's retail tax structure which became effective May 1. As a reminder, under this reform, a 6% output VAT replaces a 5% business tax currently applied to certain restaurant sales. Input VAT is creditable to the aforementioned 6% output VAT. We believe this change will have a material benefit to Yum! China Restaurant margins for the balance of the year. However, the scale and nature of the policy along with implementation and transition challenges, make it very difficult to pinpoint the exact magnitude of the impact. While we won't provide any further detail on VAT today, we expect to be able to provide more clarity on our third quarter call after we have a full quarter of results behind us. I want to point out that for the balance of the year we do expect labor and commodity inflation to partially offset this benefit. With this and our first-half outperformance in mind, our current guidance for full-year China restaurant margins is now at least 17% versus 16% previously. Outside of China, our three brand divisions remain on track to deliver results consistent with our initial 2016 targets. We expect any potential softness in top line performance to be offset by a favorable commodities environment. That being said, we're confident in our plans to drive sales improvement balance of year and are encouraged with our positive results third quarter to date at Taco Bell. On the development front, we added over 370 new units globally in the second quarter, taking our year-to-date global new restaurant openings to over 650 units. Consistent with prior years the development will be weighted more towards the second half as we expect to accelerate our pace of development balance of year, further laying the groundwork for future growth. In China, we have increased our focus on refurbishing and remodeling stores this year and we believe the momentum that we're seeing in the business today can be partially attributed to this investment in improving the guest experience. In fact, we're reallocating our capital to increase our pace of remodels to nearly 800 in 2016, up from our previous target of 550. At the same time, we're reducing both our gross and net new unit numbers for the year by around 50 to 100 openings versus our original expectations. This is primarily due to fewer new Pizza Hut Casual Dining units this year. But to be clear, our confidence level in the long term growth prospects of our brands in China remains undiminished. Also keep in mind as a division, we expect about 100 fewer closures in 2016 than we had last year and we continue to get cash paybacks for new KFC and Pizza Hut units in the three- to four-year range, both great signs of the underlying strength in the business model and the potential for future expansion. And finally outside of China, for the full year we expect another strong year of development with total gross openings of nearly 1,800 units. Turning now to foreign exchange, given the recent vote by the UK to exit the EU, I want to remind investors that one of the many great benefits of Yum! is our global and therefore diversified presence. In 2015, approximately 6% of our operating profit was generated from the UK and approximately 2% from the remaining Eurozone. That being said, with the strengthening of the U.S. dollar against most of the world's other major foreign currencies, at current forward rates, currency translation is now estimated to negatively impact balance-of-the-year operating profit by about $50 million which represents an increase of $10 million versus our initial expectations. As always, please take this as directional guidance only as rates will inevitably change as we move throughout the year. In addition, keep in mind this does not impact our core operating profit growth forecast of at least 14% which excludes the impact of foreign currency translation. Now I would like to provide you with an update on our refranchising targets. As you know in connection with the China separation, we've committed to become at least 96% franchised by the end of 2017. In the past four quarters, we re-franchised over 300 restaurants outside of China, including 82 units in the second quarter. Re-franchising will, simply put, improve our business model. Proceeds from re-franchising enable us to return significant amounts of cash to our shareholders while creating an even larger and more stable stream of franchise fees. It also produces immediate G&A savings as field-level employees are typically absorbed into our franchise system. That being said, we realize there are additional opportunities to operate more efficiently and look forward to sharing more detailed plans around our ongoing re-franchising strategy and G&A roadmap at our investor conference on October 11. Now I would like to quickly update you on our spinoff plans. We remain on track to complete the spinoff with a targeted completion date around October 31. We filed our initial Form 10 on May 3 and filed an amendment earlier this week. Our comprehensive global road shows will follow our investor conference. In conjunction with our spinoff, we're also optimizing the capital structure of Yum!. To this end, I'm very pleased to report the successful completion of our planned recapitalization in June. In aggregate, we closed on $6.9 billion of new debt consisting of a $2.3 billion financing facility, securitizing our Taco Bell U.S. royalties; a $2.5 billion senior secured credit facility; and a $2.1 billion of high-yield notes. With the completion of our recapitalization, today we have approximately $9 billion in debt outstanding at an attractive blended interest rate of less than 5%. This marks yet another milestone in our previously communicated commitment to return $6.2 billion of capital, excluding ongoing dividend payment, to shareholders. In fact, since we announced in October 2015 our intention to separate the China business, we have repurchased $3.3 billion of shares which equates to $3.3 billion of shares which equates to 42.9 million shares at an average price of $0.70. We continue to believe that our stock represents a good value at current prices. But make no mistake, this is just the beginning as we target an additional $3.5 billion in capital return across 2017 and 2018. This will take our total capital return program, including dividends, to $10 billion over about a three-year period and further demonstrates our commitment to delivering meaningful cash returns to our shareholders. So let me wrap things up. We're confident we will deliver at least 14% core operating profit growth for the full year and we're proceeding as expected with the separation of our China business. Our brand businesses are performing in the aggregate in line with our initial expectations and I'm pleased with the progress we're making in China as it approaches its first day as independent company. As Greg said, 2016 is truly a transformational year for Yum!. We look forward to sharing additional details with you at our New York investor conference in October. And with that, the team and I are happy to take your questions.

[Operator Instructions]. Your first question comes from the line of Joseph Buckley from Bank of America. Your line is open. Please go ahead.

A couple of questions, could you elaborate a little bit further on the Pizza Hut Casual Dining opening plans that I think you mentioned you scaled back? And then are the remodels, the increased number of remodels in China, concentrated on Pizza Hut? Is that the capital trade off you are making?

This is Micky. Pizza Hut Casual Dining, as you probably remember in 2015, we opened 280 units and over the last four years, we virtually doubled the estate. And we saw the trend over the last year of same-store sales and our judgment was that we should pause for a bit, so we will still build. We will be the leading developer of casual dining restaurants by far in China, but we paused for a bit. I think we're encouraged by the trend that we're seeing currently when same-store sales come back to positive territory and we will re-step up the build rate of Pizza Hut Casual Dining. As far as refurbishment is concerned, that is applicable to both our brands and it was our judgment that it was very important to improve the customer experience and also to be able to bring our estate in line with retail in China which has been modernizing in general very rapidly. So we've, as David Gibbs mentioned in his comments, we increased our remodel rate across both brands and in aggregate that will be about 800 this year, so we've effectively, in the last 18 months, doubled our rate of refurbishment to bring the estate to acceptable levels. So it's not as though we're reinvesting only in Pizza Hut. We're reinvesting in both the brands. I hope that answers your question.

It does.

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

I'm just going to try to sneak in a two-parter on China, if I may. Firstly and thank you for the color on the quarter to date basis regarding trends, but in the third quarter last year it was really a tale of I think two very different quarters where I think the first seven weeks was down 11 and then the next four weeks was up 31. So you guys kind of get to see the trends and normally I wouldn't ask you to forecast results for the rest of the quarter. But how might that significant change in trend between the first quarter and the second quarter perhaps influence the quarter-to-date numbers that you are talking about? Then I have a follow-up as well.

I think we're not going to forecast obviously the balance of the quarter and I think as we said, we're pleased with the way the quarter has opened, whether that be in obviously China on both KFC and Pizza Hut or whether in the U.S. where we've actually seen Taco Bell sales turn positive. So I think we're excited by the positive momentum we've got. We do know and we spoke about the fact that, obviously as you said, the lap gets harder. But I do see some encouraging signs in the progress we're making in a number of the businesses around the world.

And then secondly, our calculation is never perfect for this, but we do look at new unit volumes in China the best that we can based on what you all report and it does look like first-half new unit volumes in China are well off average and well off what the trend has been. So I guess I wanted you to confirm or deny that and make some comments about the overall trend of new-unit volumes in China as you continue to develop both brands.

John, I can give you a couple of technical points on that and then Micky can give you some color, but you are right. The average unit volumes that are opening are slightly down and I can give you some of the reasons. In the pool right now, we've got 100 small-box units that were test units that are obviously at slightly lower volume. We've got a little heavier weighting on Pizza Hut Home Service and our new-unit development is a little bit heavier weighted towards tiers 3 through 6. In fact, the majority of the development occurs there while some of the stores that we're closing are a little heavier weighted towards Tiers 1 and 2. When you add up all of those smaller points, you get to a little bit of a drag on new-unit volumes, but most importantly critical to us, is we're very happy with our development programs. We're getting positive cash paybacks, three to four years. Margins are improving, sales trends are improving. So we feel good about our development program. I don't know, Micky, if you have anything else to add?

No, I think you covered it well, David. I just want to reassure you -- I think this question came up in the last earnings call as well, is that is there anything fundamentally changing about our strategy or the delivery of sales and profits from new units as we go forward as compared to the past? And I think in general terms the answer is, no. We continue to build aggressively. The brand mix changed a bit and you know as David mentioned, we did build Pizza Hut Home Service restaurants that tend to be lower volume and KFC had slowed a little bit because of the two years of difficulty in sales. We fully expect KFC development this year to be ahead of our original plans and in general terms, we see the efficiency and delivery from new units as being just as good as it's been in the past. In general terms, our focus at the moment is to raise traffic and sales in all our stores and that's one of the reasons we moderated new unit builds this year. We're encouraged by the trends that we're seeing and we hope we can continue to deliver growth in sales.

Your next question comes from the line of David Palmer from RBC Capital Markets. Please go ahead.

It's Eric Gonzalez on for Dave Palmer. Just wondering if you could talk about Pizza Hut Casual Dining in terms of what's happening there in terms of price construct and media message? And also KFC seems to be on firmer footing. Maybe you can comment on some changes that are happening there? And then for both brands we were wondering how is the innovation pipeline different today in terms of tested innovation and how does that compare to a year ago?

Okay, well Pizza Hut Casual Dining I think is in a much better position with regards to the consumer proposition than it was even I would say three months ago. The positioning of the brand is quite clear. It's been explained and carried forward through the organization. It's an integrated position which covers new product development as well as service down to uniforms etcetera. and I think it's resonating well. It's called Love to Share and it's appropriate because unlike KFC where most people come in single or order their meals individually; in Pizza Hut, it's a group that tend to order their meals together. And also as you know there's a big phenomenon now of sharing the food experience through social media. And all of that is working in our favor. On both brands, the emphasis has been to continue our rate of innovation and to continue to give consumers great news. The difference is that we're doing it in a way that is operationally friendly so that it does not slow speed of service or cause problems with value. In the case of KFC, for example, as Greg mentioned, that includes Box Meals which has a well tried-and-tested formula globally that offers consumers not three but five items for a slightly higher price and offers great value. The innovation across all platforms is strong, but the big difference I think is that it is now a practical innovation that gives choice without complicating operations a great deal. Across all dayparts also, we've made significant investments in high quality coffee machines in both brands and high quality ice cream machines in the case of KFC to be able to improve our delivery and our quality of product.

Let me just add. I think what you are seeing in China is what you are starting to see in the rest of the world which is on the KFC brand, we're very focused on what buckets, boxes, burgers and wings and on Pizza Hut it's back to pizzas and pan pizzas in particular, so I think a return to the core and belief in the core that it can drive same-store sales is what you are seeing in China. I think it's resonating there and it's what you'll also see in the balance of our business around the world.

Your next question comes from the line of John Glass from Morgan Stanley. Please go ahead.

I just wanted to go back to this inflection in China because I think it's important, but if I recall correctly you were down 11% in the first half or first seven weeks of the quarter last year and then you we were up like over 30%. So first of all, is that correct? What drove that inflection last year just so we understand what the hill we have to climb this year is and what we're up against and you didn't update your total comp guidance for the year for China. Last quarter you said you didn't want to either. Do you have any updated thought just on the year holistically so that we can think about this beyond the next few weeks?

I guess what I would say is, it's really quite hard to look at one, two, three year comps in China and with any certainty be able to forecast sales. We're encouraged by the trends that we're seeing right now. We're not changing our annual guidance of 2% to 3% same-store sales growth in China. We're in that range today year to date, but certainly if the current trends continue we would be able to beat that number. We do caution that the second half laps get more difficult, but again it depends on how you look at them. The initial food event that we're lapping occurred towards the back half of July and that makes the comps really hard to look at.

Your next question comes from the line of Brian Bittner from Oppenheimer. Please go ahead, sir.

I will try to wrap two questions into one. Couldn't help but notice the at least language that's in the new profit guidance, that at least language wasn't in the old guidance. Was that deliberate? Are you starting to see some nice potential upside to profits on the back half given the potential operating leverage that you get out of China and maybe some easier profit laps from some of the non-China segments? And also on the G&A side, Greg, you talked about an optimized cost structure when you have the franchise model in place. Is that something we're going to hear more about at the Analyst Day or is there any initial thoughts you can maybe give us on how you are thinking about that today? Thanks.

I will take the second one first which was G&A. I think as we've said and continue to say, we will have a comprehensive review of our G&A structure in October when we meet. Obviously we're going through the whole strategy structure, the culture process and I'm very confident that we will be able to share in great detail those numbers when we meet in October. So I think we're only a couple of months away. We're finalizing all of those plans and we will be able to provide a greater amount of detail about the efficiency we can bring to the business. With that I will throw the first part of the question back to--

Just in terms of our forecasting through the year, the use of the word at least obviously indicates that we see some upside to the numbers that we're communicating, but as we've all learned, these are difficult businesses to forecast with any precision. I feel more comfortable conveying where we're at with those terms.

Your next question comes from Sara Senatore from Bernstein. Please go ahead.

I will also ask I think a two-part question here on China, if I may. First, I was interested to hear you say that you are still going after the lower-tier cities in the sense that all of the macroeconomic indicators seem to be weaker in many of those cities than they are in the higher tiers. So I just wanted to ask about new unit economics, confirmation that they are still very good in those lower-tier cities given what we're hearing about just the macro backdrop? And I guess the second point was about the China margins. I know you gave some color on that. Also surprised to see the commodity -- it looked like the food margins were good in the context of it seems like an emphasis on value, so maybe you could just help me think through what the complexion of those margins should look like going forward? Will we continue to get that kind of tailwind and will there be headwinds on the labor and expense side? So the unit economics and margins, if you will.

I will take the margin question and then I will turn it over to Micky for some color on developments which is what I think you are looking for. On the margins, you can see we had 1 point of margin improvement in China in the second quarter. That was really fundamentally the food and paper outperformed the inflation that we saw in labor to give us a 1 point benefit. What went into that food and paper upside is really sort of four components. It was a price benefit, a mix benefit. We did have deflation and then of course, the VAT shows up there and in a couple of other line items. And then I will turn it over to Micky for some color on development.

Yes, I think one of the strengths of Yum! in China is that we're so widely present across the country, as you know over 1,000 cities with KFC. As mentioned earlier, our Pizza Hut development rate this year has been moderated a bit, but KFC will be on or ahead of plan. I can confirm that our new unit returns are very high. They are at the highest they've been for four years in terms of percentage of units beating hurdle rate as set in the CapEx. So we're very confident that we're not over-expanding at all in the smaller-tier cities. It is our belief that under challenging economic conditions you get the best long term deals and if we're able to secure long leases for these stores, we're very confident these stores will make good returns in the future. So I don't think we're concerned at the moment with the rate of return on our new store sales.

Your next question comes from the line of David Tarantino from Baird. Please go ahead.

My question is about the divisions outside of China which you said on a combined basis are tracking to reach their profit plan, but it does look like they might miss their original cost plan. So the question is, what is supporting the profit outlook and does that comment apply to each of the divisions individually or is that a comment on the combined basis?

I think on a combined basis, we did talk about that the second half of the year would be better for us from a profit standpoint and that Q2 was a difficult quarter for us. So as I reiterated in my prepared remarks, we feel like the divisions from a profit standpoint are on track.

And I think the other thing is, as we said we're seeing some improvement as we start the third quarter. Taco Bell which obviously was negative in Q2 has turned positive in Q3 through the first five or six weeks of the quarter. The KFC U.S. number is also stronger than the plus 2% we had, so I think we're feeling that there's some momentum. Obviously, I think as we all know in the U.S., the market is a little soft, but I think that we see some momentum in sales. I think that we believe that commodities will be under control and I think as I even may have said on the last call, we're confident we can deliver the outside of China profit numbers even if the sales numbers are just a little tough to get to.

Your next question comes from Joseph Buckley from Bank of America. Please go ahead, sir.

I wanted to just check on the check and the traffic components of the same-store sales. I'd love to get it for both China KFC and Pizza Hut individually and then for the U.S. comps for KFC, Pizza Hut and Taco Bell.

Yes. So for China, we can provide you at a division level that price contributed 2 points, mix contributed 3 points and that covered a 5 point decline in transactions. Of course as we talked about on the last call, the transaction decline is not necessarily per person, as we think our party size has increased given the promotions that we're running.

And if you, if you want to talk about the U.S., I think that was also part of the question. I think the Taco Bell miss was a transaction miss pretty much. I think that's probably the best way to describe it. And our look at the category also is probably for the trailing 13 weeks the U.S. is probably running about minus 1 same-store transactions and probably around plus 1 same-store sales. So that's the sort of numbers that we see. But the Taco Bell miss was essentially driven by transactions. But as I said, I'm happy that in the first five or six weeks of the third quarter we're back in positive territory on Taco Bell. So that's a nice change in momentum.

Your next question comes from Karen Holthouse from Goldman Sachs. Please go ahead.

Just actually a follow-up to the pricing piece in China, it seems like it's a little bit more price than we seen since some of the food safety incidents happened. As you are getting farther away from that and you sound pretty positive on underlying momentum in the brands and the positioning, do you think that's giving you permission to potentially get a little bit more aggressive on the pricing front if you want to?

Let me clarify something, Karen, then I will turn it over to Micky. On the pricing, that was all roll-over pricing, there was no pricing raise in the quarter. But I will turn it over to Micky for more color.

Thank you. Karen, in general we had as you know, commodities were very favorable in the first half, so we really didn't see any reason to take pricing. We continue to offer bigger meal bundles and especially buckets and they offer a great value anyway. The net impact of pricing is actually two which is all rollover. The rest of it one shape, way or form is on account of more customers or more food per customer which are both good news. We have to watch commodity inflation in the back half. At the moment we feel pretty confident that we can deliver through other productivity initiatives our profit targets without having to take recourse through pricing. But obviously we remain sensitive to commodity and we will not be stupid about it, but we do want to contain pricing for as long as possible, to maintain price stability in the market as well as to continue to offer great value. We're very focused on transaction growth, but we will not do it at the expense of profits come to that. The way things are at the moment, we feel pretty comfortable that through the year we do not have to take any further pricing, but we're watching commodity, especially poultry very carefully in the back half.

And if you are not going to take any pricing for--

Your next question comes from Jeffrey Bernstein from Barclays. Please go ahead.

Just two related questions on the China separation and the cash flow it's generating. One just on the separation, I'm just wondering whether there's any consideration at all for options other than the current spin plan? There's always talk about a sale of part or all to third parties or other opportunities and I'm just wondering whether you would offer any insight onto that? And then the second question was just on the cash return. I think, Greg, in your prepared remarks you say we're going to return a significant amount before and after the spin. I'm just wondering whether we should assume it's a traditional open market share purchase which I guess gives you the flexibility or are you considering maybe ASRs or special dividends or other forms of that? Thank you.

I think with regard to the spin, I think as we've said multiple times, we looked at a number of options to maximize shareholder value and we believe and continue to believe that a separation or a spin is the best way to maximize shareholder value. We're 100% focused on that. As we said in the Form 10 filings -- everything else is going ahead in China, starting things like Board selection. And so we're really doing all the things you'd expect. We're right on our timeline in order to hit the separation on October 31, plus or minus a couple of days. And we continue to believe that is the very best way to maximize shareholder value. I will hand over to David who can just give you an update on cash return.

Yes, as far as cash return goes, obviously we feel good about the share repurchases we've made year-to-date at attractive prices and that our stock is priced attractively for continued share buyback. But that's something that we will continue to evaluate. There's other options, special dividends, tender offers and we will continue to revisit that decision as time goes on, but the intent obviously is to return that cash this year.

Your next question comes from Andrew Charles from Cowen. Please go ahead.

A lot of my questions has been answered but, Micky, this is the fourth consecutive quarter of positive gross margins in China, so I just wanted to ask holistically about your willingness to sacrifice some of that margin in order to drive traffic by focusing more aggressively on value. I know obviously you are going to have some pricing that rolls off and inflation is likely to reaccelerate. But just thinking about how that ties into the margin profile of Box Meals? And then separately, David, just a follow-up on that last question. Was just hoping you guys could take about how you are evaluating the remaining $3.3 billion of cash return to shareholders through October. Current trading prices, we're estimating this is going to be about 20% of your daily trading volume if you were to repurchase that all over the course of every day over the next three-and-a-half months. So it just seems like an ambitious endeavor and just want to hear what kind of factors would lead you guys to relocate some of the cash through a special dividend? Thank you.

I will just take your pricing question and then hand over to David. We do not really see any need at the moment to sacrifice margins. We believe we have good price points now. We've captured key velocity price points around the RMB29 mark for individual meals for slightly bigger meals for individuals at RMB35 mark and I believe our buckets are competitively priced. We're very keen to hold that for a period, but we don't see any reason to lace up the transactions any further. I don't think it will get helped particularly by pricing. We're however doing more and more effective marketing activity through digital media, etcetera. which is a complicated topic, but we're getting higher and higher efficiencies that's allowing us to target specific consumers that will allow us to drive traffic to our stores and develop sales satisfactorily. So the short answer is we're not looking at all to dilute our margin.

Yes and then on the share buyback question, just a little bit more detail on that. Our plan is to get the vast majority of the buyback done by the separation. But obviously we're going to be smart about it and recognize that we have to comply with the regulations on that. So some of that may spill over but we still think we will get it all done by the end of the year.

Your next question comes from Dennis Geiger from UBS. Please go ahead.

Greg, can you talk a little bit more about the brands in the U.S. and how you feel you are positioned on value currently, particularly at Taco Bell? Any surprises over the last few months that you've seen from competitors or the changes in consumer sentiment that has made you change your approach and get even more aggressive than you had otherwise planned into the back half of the year?

That's a good question. I think, as we said earlier, there is I call it a malaise in the U.S., is probably the best way to describe it. And I think there was an interesting report out yesterday that I think 75% of people 18 to 30 believe that the U.S. is either falling behind or failing as a nation, according to a GenForward Survey. So that's not particularly good news from just what are people thinking. As I said earlier, we believe that in the U.S. the market is on a trailing 13 is about a minus 1% in transacts, it's probably plus 1% in sales. As I said, I think the good news is we have started the third quarter stronger than we had in the second quarter. I think what it means is for brands like Taco Bell, we've got to make sure that we get our communication really tight and focused. I don't necessarily believe it means we have to drop our prices anymore. I think we've got to do a better job of communicating our value. And we also have to remember that the Taco Bell brand always responds to incredible breakthrough innovation. So I think you'll see more of that coming from Taco Bell. I have to give the KFC U.S. teams credit. I think George Hamilton, as the new Colonel behind Extra Crispy is brilliant and that is having a positive impact on our sales momentum at KFC in the U.S. right now. So we've gone back to a core product. We haven't had to discount. We've obviously wrapped it around $20 buckets and $5 boxes, but we've just done a much better job of breaking through with the communication. And then I think on Pizza Hut, we've announced that we're moving to a new agency. We will get to a new campaign sometime before the end of the year and I think the Pizza Hut team would agree, we can do a better job of communicating both better and easy. So I'm positive about what's happening now and I'm positive about what the guys are working on. And as I said, kudos to the KFC team, who I think have taken a core product and demonstrated you can deliver above-category growth by making sure you really have breakthrough communication. So better communication and making sure we've got the right price point, making sure we've got breakthrough innovation. I know that's what the three U.S. brands are focused on. I'm encouraged by what I'm seeing and I'm encouraged by the momentum we have going into the third quarter.

So what I would like to do, I think just to quickly wrap up. So first of all, I want to thank you all for being on the call. We really appreciate it. Pretty much my last answer probably summed up a lot of it which was we're encouraged by the progress we're making, particularly in those businesses that we've been focused on which is both Pizza Hut and KFC in China as well as KFC and Pizza Hut in the U.S. As I said, we're off to a good start in the third quarter in both China and the U.S. and all of us and particularly I'm looking forward to catching up with everyone at the Investor Conference in New York on October 11. Thanks for being with us today. We really appreciate it.

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