Keith Siegner - VP, Investor Relations & Corporate Strategy Greg Creed - Chief Executive Officer David Gibbs - President and Chief Financial Officer Micky Pant - Chief Executive Officer, Yum! Restaurants China Ted Stedem - Chief Financial Officer, Yum! Restaurants China

Sara Senatore - Sanford C. Bernstein & Co. Brian Bittner - Oppenheimer John Glass - Morgan Stanley Michael Barbarula - JPMorgan Joseph Buckley - Bank of America Merrill Lynch David Palmer - RBC Capital Markets David Tarantino - Robert W. Baird & Co. Greg Lum - Goldman Sachs Jeffrey Bernstein - Barclays Matt McGinley - Evercore ISI Andrew Charles - Cowen and Company Brett Levy - Deutsche Bank Dennis Geiger - UBS Jeremy Scott - CLSA

Good morning. My name is Amy and I will be your conference operator today. At this time I would like to welcome everyone to YUM! Brands Third Quarter 2016 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] We ask that you please limit your questions to one question and then reenter the queue for any follow-up questions. Thank you. Keith Siegner, Vice President, Investor Relations and Corporate Strategy. You may begin your conference.

Thanks, Amy. Good morning, everyone, and thanks for joining us. On our call today are Greg Creed, our CEO; David Gibbs, our President and CFO. Also on today’s call is Micky Pant, YUM! China’s CEO; and Ted Stedem, YUM! China’s CFO. 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 uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to the investor section of the YUM! Brands website, www.yum.com, to find disclosures and reconciliation 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 this recording. We would like to make you aware of the following upcoming Yum! investor events. Our 2016 Investor and Analyst Conference will be next Tuesday, October 11 in Midtown Manhattan. Live webcast will be available at www.yum.com/investors and will be available for playback within 24 hours after the call. Now, I’d like to turn the call over to Mr. Greg Creed.

Thanks, Keith, and good morning, everyone. Yum! Brands delivered third quarter core operating profit growth of 11% and EPS growth, excluding special items of 9%. For 2016, we are raising our core operating profit growth guidance from, at least, 14% to at least, 15%, owing to continued strength in our business outside of China and solid profitability in China despite sales headwinds, which I’ll discuss shortly. Today, I’ll give you an overview of each of our operating divisions, and then David Gibbs, our President and CFO will walk you through the financials. After that the team and I, including the Micky Pant, CEO of Yum! China; and Ted Stedem, CFO of Yum! China will be happy to take any questions you might have. For those of you who don’t know Ted, he joined the Yum! China team in August. He has been with Yum! for the last seven years and served as CFO of KFC Australia and New Zealand and most recently as a General Manager of our KFC Asia business outside of China. Ted brings significant financial and operational expertise to Micky’s leadership team, as they prepare for the separation. Now, let’s begin today with China. As we mentioned on our second quarter call, we were pleased with the results we saw through the first six weeks of Q3, as sales were ahead of our plan. However, tougher laps in the second-half of the third quarter, which we built into the forecast were compounded by an international court ruling regarding claims to sovereignty over the South China Sea. The ruling triggered a series of protests and boycotts intensified by social media against a few international companies with well-known Western brands. At its peak, the demonstrations significantly impacted store traffic in certain trade zones and this was during our busiest season. The impact to our sales was sudden and while difficult to pinpoint the exact magnitude of the impact on the quarter our best estimate is, there was a 400 to 500 basis point impact to the division’s same-store sales in the quarter. Most importantly, as we got further away from the incident in July, sales improved. Fourth quarter, which began in September has seen improvement continue with quarter-to-date sales down modestly. We’re encouraged by recent trends through the important Golden Week holiday, which is currently ongoing and optimistic about a strong product and promotional calendar for the balance of the quarter, which Micky will discuss. Given these trends in the business, we expect same-store sales to be positive for the balance of the quarter. In spite of the external headwind, the team was able to execute well and manage costs, resulting in solid profitability with core operating profit up 14%. It is unfortunate that something outside of our control impacted our sales. But thanks to solid execution it appears to be mostly behind us at this point, and we are moving forward with excitement about the balance of the year with confidence in the long-term potential of this business. As we prepare to separate the China business, there is a lot to be excited about. First, the strategic partnership we previously announced with Primavera and Ant Financial is a tremendous asset and competitive advantage. Both are well respected Chinese institutions that are ideal partners for Yum! China as a standalone public company operating in China. Second, we are the undisputed category leader in digital engagement. We’re building the world’s greatest loyalty program with a large and growing database to help us drive future sales. Our mobile payment has doubled from 10% to 20% of sales over the last year. And with Ant Financial’s Alipay, we’ll continue to grow. Third, delivery. We currently offer delivery for more than 4,000 units across China. This is an unmatched and growing platform that affords further growth opportunities. And finally, idea sharing. As we get closer to separation what is ironic is Yum and the China division have never been closer from a know-how and idea sharing perspective. And this will continue post-separation. You’ll hear a lot more about all of this next week. Now, onto our three brand divisions, where I’m excited to say, we are on track to deliver another year of strong operating profit growth, which is a testament to the talents and capabilities within the global team. For the third quarter, we’re very pleased that in aggregate, our business outside of China produced 11% core operating profit growth ahead of our expectations. And what has been an overall sluggish environment for the QSR category, particularly in the United States, two of our three brands have been delivering solid results and have continued to do so into the fourth quarter thus far. Our KFC Division excelled. Same-store sales grew 4% in the third quarter, or 7% on a two-year stack. Core operating profit grew 19% in the quarter and the division opened 138 new international restaurants in 42 countries. 70% of our new international openings were in emerging markets. System sales in international developed markets grew 4%, and international emerging markets grew 12%. This brand continues to perform in nearly every market globally, with particular strength in Russia, Continental Europe, and Africa this quarter. And we remain on track to open, at least, 475 net new international units this year, and the U.S. is full steam ahead on its remodel program. In particular, I’m pleased with the third quarter results out of the U.S., which were driven by the Extra Crispy campaign. We continue to gain traction with our strategy here and our 6% same-store sales growth lapped 2% growth in the prior year. Two-year comps of plus 8 in the quarter are category leading. And this is our 9th consecutive quarter of same-store sales growth in the U.S. and speaks to the importance of an aligned franchise system and strong marketing adhering to core, innovation and value. The KFC U.S. team in partnership with the franchisees have really turned this brand around in the last two years. And the brand’s continued strength in a sluggish QSR market is commendable. This achievement in the U.S. gives me confidence in continued global success, as we share best practices across the system. Pizza Hut system sales in constant currency were flat and same-store sales declined 1% in the third quarter. The U.S. market was influenced by an unsuccessful promotion and the competitive environment. As we saw earlier this year, we know the brand can perform when the right product is combined with compelling value and the messaging is distinctive and disruptive. Now, I’m confident in our ability to turn around the Pizza Hut U.S. business. We believe the fundamentals are being put in place and now execution is the focus. Our international business at Pizza Hut saw system sales growth of 3% in constant currency and flat same-store sales growth in the quarter. Across our international markets, we are leveraging a wealth of proven, ownable value bets to address specific consumer needs and rolling them out rapidly from one market to another. In Thailand, for example, we took a bold approach to value, leveraging any construct in tandem with significant product and operations improvements and have seen double-digit sales and transaction growth since launch. Other markets now are taking learnings from this significant turnaround. This traction gives us confidence that the international Pizza Hut turnaround is underway. Finally, I’m very pleased to talk about strong performance in the third quarter. Core operating profit grew 9%, U.S. same-store sales grew 3%, even as we lapped a plus 4% from the prior year. This included 1 percentage point of growth in transactions, or over 2 percentage points better than the industry. Our strategy of bracketing value with $1.49 steak flatbread sandwiches and $5 boxes, which provided abundant value allow us to grow transactions and boost check. Furthermore, we saw impressive results with our breakfast offering in the quarter as transactions grew 14%, driven by a $1 breakfast menu. We’re now taking the learnings from this success and promoting our All Day dollar menus. This all goes to show that when you remain committed to the core and value, the results follow. In addition to being a clear leader in offering low prices, we are now leading the category in good value for money. As for Taco Bell development, we remain on plan with at least 300 new restaurant openings for the year. Taco Bell international is an area of enviable growth potential and we are excited to see the momentum behind this strategic objective. While it’s early days, we believe this could be a meaningful driver of long-term growth and look forward to continued progress. So 2016 marks the beginning of a massive transformation for Yum!, a transformation that has been years in the making. The first step is the October 31 separation of the China business. This business began with the first KFC in Beijing, nearly 30 years ago and has grown to over 7,000 restaurants in over 1,100 cities. Today, it is one of China’s largest employers with over 400,000 employees, serving over 2 billion customers every year. In short, this business is a powerhouse with unrivaled growth opportunities in the world’s fastest growing major economy. As we announced on September 2, investments like Primavera Capital Group and Ant Financial bring strategic value and additional local and digital know-how immediately and over the long-term. In addition, on September 15, we announced a world-class Board of Directors for Yum! China with Dr. Fred Hu, Chairman and Founder of Primavera Capital Group to serve as Non-Executive Chairman. I have the utmost confidence that this Board will offer the marketing insights and strategic vision required to enable Yum! China to reach its full potential. Including the Primavera investments, Yum! China will have a very strong financial foundation, over $900 million of cash and no external debt on the balance sheet at spin. I couldn’t be more optimistic about the future of this business or the great foundation that is now in place for them to begin their journey as an independent company. And I look forward to watching them succeed for many years to come. So in conclusion, at New Yum! the massive transformation will continue as we become a unique and focused world-class franchisor. Following the separation, we will be roughly 93% franchised with a clear path to reach our stated goal of becoming, at least, 96% of franchised by the end of 2017. We’ve given a great deal of thought towards creating a high-growth, asset-light efficient company, best position for accelerating growth in global system sales, operating profit, and cash flow. And we’re excited to share more details behind our thinking here next Tuesday. So stay tuned. And with that, it gives me pleasure to hand over to David Gibbs.

Thank you, Greg, and good morning, everyone. In my remarks today, I’ll cover three areas. Our third 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 third quarter performance. We’re pleased the Yum! Brands delivered year-over-year core operating profit growth of 11% in the quarter. In aggregate, our three brand divisions, excluding China delivered 11% core operating profit growth in the quarter, led by 19% growth at KFC, partially offset by soft results at Pizza Hut. This growth is especially impressive, given how competitive and sluggish the QSR category has been recently, particularly in the U.S.. Combined, our brands are outperforming the category and we’re pleased to see relative outperformance continuing thus far in the fourth quarter. In our China division, core operating profit grew 14%, despite a 1% decline in same-store sales. The implementation of a value-added tax and continued tight cost controls materially benefited unit economics and enabled us to offset inflation and sales to leverage, primarily resulting from the South China Sea ruling. As Greg mentioned, tougher back-of-quarter laps were compound by the incident. While it is very difficult to be precise, given all the moving pieces in our China business right now, our best estimate is, this had a 400 to 500 basis point impact to our same-store sales in the quarter. It was most severe in July, primarily affecting our stores in lower tier cities, where the protests were most intense. The impact continues to dissipate and sales have recovered off their lows. Overall, for the quarter, EPS before special items grew 9%, including a 6 point negative impact from foreign currency changes. Now, I’d like to discuss our 2016 outlook. As Greg mentioned, we’re raising our 2016 full-year core operating profit growth guidance to, at least, 15% from at least, 14%, including the 53rd week. This increase is supported by strength in our overall business outside China and healthy profitability in China, despite temporary sales headwinds, as we discussed. As expected, third quarter margins in the China division benefited due in part to the diligent effort across our entire China team in implementing the new VAT. In each of the last two quarters, we highlighted the changes to China’s retail tax structure, which became effective on May 1. The benefit to our business continues to fluctuate from month-to-month, as we refine our ability to get input credits and as the interpretation of the new tax code becomes clear. As a result, we will not provide precise guidance for the future benefit of this tax change other than to say that, we expect it to be worth, at least, two points of margin upside on a go-forward basis. We still expect full-year China restaurant margins of, at least, 17%. This reflects the ongoing benefit of the VAT, offset by labor and commodity inflation, as well as our investment back into generating sales. Now, let’s talk about development. Yum! remains one of the leading global retail developers. In the third quarter, we added over 475 total new units, taking our year-to-date global new restaurant openings to nearly 1,150 units. Consistent with prior years, development will be weighted more towards the fourth quarter, as we expect to accelerate our pace of development balance of year, further laying the groundwork for future growth. For the full-year, we expect China to add about 525 gross new units and for New Yum! Brands to add over 2,175 units, which will continue to include China. With regards to re-franchising, we’ve committed to becoming, at least, 96% franchised by the end of 2017. Once we finalize the separation of our China business, we will be 93% franchised. Over the last four quarters, we’ve re-franchised nearly 470 restaurants. In the third quarter specifically, we re-franchised 94 stores, 48 of which were Pizza Hut restaurants. Re-franchising allows us to return significant amounts of cash to shareholders, while reducing G&A expenditure as field level employees are typically absorbed into our franchise system. We look forward to sharing our strategy for improving overall efficiency of Yum! with you next week. One housekeeping item. Unallocated corporate G&A in the quarter, excluding special items was $44 million, with the increase versus last year largely due to timing. For the full-year, we expect this to come in closer to $205 million, excluding special items. Now, I’d like to talk about our capital structure. In connection with the pending separation of our China business, we are optimizing the capital structure of Yum!. We closed the previously announced $2.5 billion new senior secured credit facilities and $2.1 billion senior unsecured notes offering on June 16, which was five days into our third quarter. As a result, we have total debt outstanding of $9.2 billion. Our intention is to maintain leverage equal to about five times EBITDA at New Yum!, while Yum! China should have over $900 million in cash and no external debt at separation. In the quarter, we also swapped a portion of our floating rate debt to fixed, resulting in about 90% of our debt fixed for a total current blended rate of 4.75%. With this in mind, we expect interest expense of about $300 million in 2016. We’re fully committed to returning cash to shareholders. Last December at our Analyst and Investor Day, we committed to returning approximately $6.2 billion of capital, excluding our ongoing dividend payments between separation announcement and completion, which assumed a year-end 2016 separation of our China division. In connection with this, we have repurchased approximately 5.3 billion shares at an average price of $81, reducing our share count by approximately 15% as of October 4. We plan to return the remainder of our previously committed $6.2 billion of capital before year end. Including our recently increased quarterly dividend, we have returned $5.2 billion to shareholders year-to-date. Now, I’d like to quickly update you on our China separation plans. We are on track to complete the separation after the close of business on October 31. On September 23, the Board approved the separation of our China business via a dividend distribution of one share of Yum! China common stock per each share of Yum! Brands common stock held at the close of business on October 19, the record date for the distribution. We expect to complete the distribution of Yum! China common stock to shareholders on October 31. When issued trading for both Yum! Brands and Yum! China will begin on the NYSE on October 17, and Yum! China will begin trading regular way as an independent company on November 1. As Greg mentioned, we were pleased with the announced investment in Yum! China by Primavera Capital and Ant Financial. They will make a $460 million strategic investments, reflecting an 8% discount to the volume weighted average trading price in days 31 through 60, following the separation of Yum! China. Additionally, they will receive two warrant tranches, representing approximately 2% of equity value in each tranche, with strike prices equating to Yum! China equity values of $12 billion and $15 billion. This is an attractive structure for shareholders, as it minimizes upfront solution and highlights the long-term value in Yum! China as an investment. More importantly, we are thrilled with the strategic partnership and the benefits this offers to Yum! China. Both Primavera and Ant Financial are well-respected Chinese institutions that are ideal partners. Dr. Fred who leads Primavera will become the Non-Executive Chairman of Yum! China, and Ant Financial will have an observer seat. Given the value of these ideal partners will bring to the table, we believe Yum! China is set up for success immediately and over the long-term. So to wrap things up, we had an exogenous and temporary event hit China sales mid-quarter. But we’re able to hold the line on operating profit in China and with the strong performance of our brands outside of China, in aggregate, we have line of sight to at least 15% core operating profit growth for the full-year. As Greg said, 2016 is a truly transformational year for Yum! We’re nearing completion of the separation of our China business and have secured strong strategic partners. We’ve enhanced our capital structure and we’ve made progress on re-franchising. We look forward to sharing additional details on these matters and more with you at our New York Investor Conference next Tuesday. And with that, the team and I are happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Sara Senatore with Bernstein. Sara, your line is open.

Thank you. Thanks very much. I would like to ask just quickly about China and this – the protest. And in the context of, I think, you’ve laid out sort of comps that over the long-term you would target in the mid single digits. But it feels like, we’ve had a hard time getting there with periodic things that are outside of your control. So, I guess, the question I have is sort of twofold. One is, is there just a higher country risk now? And does that mean that long-term targets of kind of 4% to 5% maybe are going to be harder to reach? The second point, is there an opportunity to make up some of that top line gap with faster unit growth? Because it looks like unit growth gross units has continued to come down a little bit? Thanks.

Micky, we’ll let you take that.

Yes. Well, thank you, Sara. I think the first point nobody likes giving weather and politics and reasons like that for sluggish sales. So trust me, we’re very disappointed with the negative comp number. But this was very unusual. As you know, the first-half of the year, we were trending very nicely. In fact, third quarter – second quarter of this year was the fourth straight quarter of same-store sales growth. And in Q3, we were trending through the middle of the quarter very strongly. And then right around the July 13, this matter started and we saw a very sharp sudden decline in sales. The good news was that thereafter the recovery started almost immediately within 10 days or so, but it did have this impact. Two things, first is that unlike a food safety incident research that we’ve conducted has shown that, there has been no damage whatsoever to the brand. Our trends have continued to improve. And I think the other point, which was mentioned in the – by both Greg and David, the spin-off coupled with the two very strong strategic partners we’ve got have very deep respect in China I think that will help us in the longer-term in issues and matters like this. I think, if you are at the October 11, Tuesday Investor Meeting in New York, we’ll give you more comfort as to why we feel that we can grow comps into the future. But had it not been for this incident, we would almost certainly have had comp growth in Q3, and we’re expecting from this point onwards through the rest of the year to get back to growth.

Next question please.

Great.

As far as the new unit development is concerned, I think for the quarter, I think the impact was, yes, it’s just – I don’t see any particular reason why we will not have strong new unit growth. Again, we will share more details on the 11. This year, as you know, we did take our Pizza Hut dine-in build rate down from last year’s 280 to about 150. That was done 150 still on a base of 1,500 is about 10%. We felt that was a responsible thing to do and to get Pizza Hut comps back, which are trending upwards. And once that is done, I think, we’ll get back on to a strong growth path. So we don’t see really a sort of ongoing decline in our new unit build rate in China at all.

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

Thank you. Good morning, guys. A question on the non-China business. The Taco Bell and KFC businesses are going to be, I think, a little over 80% of new Yum!’s profits after the separation. So it is really nice to see the comp acceleration in the sales at both of those brands. And I guess, this has seemingly happened without an industry acceleration underneath you. So what was it that changed so quickly in the third quarter for both of these brands to really divert from the industry so dramatically? And how much follow-through does this have going forward, the strategy that drove that?

Thanks, Brian. Yes, I think, I wouldn’t say it was an abrupt change. I think certainly if you take the U.S., I mean, KFC U.S. has just delivered its 9th consecutive quarter of same-store sales growth. There’s no doubt the plus 6 rolling over plus 2 and plus 8 is definitely means, we’re growing share in the category, which is great. I put it down to, and if you think about what we ran in the quarter, we essentially ran extra crispy chicken, which we’ve had for over 40 years in a $5 dollar box and a $20 bucket. I think what it demonstrates is, when you have distinctive and disruptive positioning and breakthrough advertising with great product quality and very good operations, I think, what you’ll see is, you can get the customer to actually come in more often. And so I think that was certainly the KFC story. I was particularly proud of what the Taco Bell team did and how quickly they reacted to their Q2 minus one number to change the calendar for Q3. It’s not easy to do. So a huge callout to the Taco Bell team for basically getting us back into 1.29 flatbread, the Triple Double Crunchwrap, which did incredibly well and obviously then putting it in a $5 box. So, I think, the answer is, we’re back to the core selling great core products. We’ve got distinctive and disruptive advertising and positioning and I think that’s the cornerstone for success.

And the $1 all day menu at Taco Bell that you talked about, is that the same as the $1 cravings menu that you’ve had, or is there something incremental coming on the all day $1?

Yes. So they ran a $1 breakfast menu through the quarter. And that, as you saw, delivered a really impressive 14% transaction growth in that daypart. What they’ve done is, they’ve now taken that to an all day value menu play, which has only just started in the marketplace. I think, as I said, what is impressive is not only do we have now the market leading position for a lot of prices we now have the category leading position for every day great value. And so I think that you’re seeing these brands, particularly both of these brands strengthen in the marketplace.

Okay. Thank you.

Your next question comes from the line of John Glass with Morgan Stanley. John, your line is open.

Thanks very much. Micky, I wanted to maybe just go back to you and talk a little bit more broadly about how your strategy in China is evolving. I think when you came in you focused more on the core, the buckets, and the value boxes. So what’s working now in China? Do you need more value – and how have you used this crisis and how have you responded to it maybe differently than you’ve done in prior periods if there has been any response? Can you talk a little bit about product evolution and price evolution? And I think in the past you’ve given sort of the breakdown in China between traffic ticket and pricing, if you could provide that for this quarter? Thanks.

Sure. Firstly, what’s working is, I was struck by when Greg was talking about the KFC U.S. business is very similar things. As you probably know, we did divert capital to store refurbishment in a very large way, so we’ll give more details on the 11th, but we’ve improved the look and feel of our stores quite considerably, especially in the larger cities. We did focus on our core bestsellers. So we did simplify the menu just a little bit. But the core bestsellers, including fried chicken, [indiscernible] sandwich were dialed up, and that is having a beneficial effect. Key price points, especially that crucial RMB29, RMB39 price points, which are the last two price points in this market. And lastly, digital. I think digital has been probably the most significant growth area for us. Our cashless payments have grown from 10% to 20% in a very short period of time. We expect that to continue as we partner up with people like Alipay to expand it. And our loyalty programs are significant now. So the percentage of transactions that are being scanned at the till for loyalty points is very significant. And overall spend on digital has become a very large part of our total marketing spend. All this put together is having good results. And we’ve accordingly geared our calendar for the balance of this year, as well as for next year. So both on KFC and Pizza Hut considerable attention to core product key price points and continued in-store execution. And that really is what’s working.

And just the breakdown between traffic ticket and pricing

That strategy – sorry, the second part of your question.

Sure. To give you the breakdown, we had a pricing impact of plus 1%. We had a mix impact of plus 3%, and we had transactions down 6% to deliver our same-store sales.

Thank you so much.

Next question please.

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

Yes. Hi, thank you for the question. This is Michael on for John. Just on G&A in the context of being a 96% franchised business and post-spin, how is the company going to think about G&A? Will you look at G&A on a per store basis, or a percent of system sales? We are just trying to get a sense of what the right metric is and if there’s a target or a benchmark? Thank you.

Yes, that’s something that we plan on addressing in great detail at the Investor Conference next Tuesday. And we’ll probably give you a couple of different ways to think about it and some frameworks. But we’ll mostly be focused on G&A as a percentage of system sales.

Thank you.

Next question please.

Your next question comes from the line of Joe Buckley with Bank of America. Joe, your line of open.

Thank you. The question is on China, as well. I know you said that the sales impact is dissipating and you expect to be positive in China for the balance of the quarter. Does that mean that for the full quarter you’re expecting China comps to be positive? And then also on China, you mentioned the VAT tax having at least a 200 basis point benefit on a go-forward basis. Was that the benefit in the third quarter? Can you share that with us as well, please?

Let’s take the first.

Yes, sure. Look there was a benefit in the third quarter and it’s an ongoing benefit and it’s significant. I’ll let Ted answer that question. So maybe, Ted, do you want to start with that and then I can get to the other part.

Sure. On the VAT, as David said, we’re still in the early months of the implementation of the VAT and the impact it has fluctuated since it was implemented. In the third quarter, it’s fair to assume that the VAT was the primary driver of our margin improvement.

This is David. Just on the question about the guidance for the quarter, we don’t, as you know, we don’t typically provide guidance for sales in the quarter. But we did obviously mention, that we feel better about the balance of the quarter. We’ve got some great promotions on the calendar in November and December that we’re really excited about. And that’s why we feel bullish on the balance of the quarter. But I’ll let Micky talk a little bit more about some of those promotions and the impact we’re expecting on the business.

Yes. Well, as you know, it’s a four-month quartet and we’ve passed September, which is a tough lap for us. We’re in the middle of the Golden Week, which is the second most significant holiday after the Chinese New Year, and that is going well at this time. It’s a peak selling period and comps are good. Thereafter, what we’ve got in the month of November is a winning item that’s been tested very well and we’ve done well in the past extended through November, which is the snack platter, which is a good example of how KFC in China is unique in the sense that the snack platter has got four parts to it and three of them are familiar to people from anywhere in the world, which is French fries, popcorn, chicken, and hot wings. But the fourth part is squid, fried squid, which is quite unique to hear. It’s done very well in the past. We’ve got that at a very keen price point of 29. So we feel very good about our November calendar. And then in December for the first time last year, we started Christmas promotion. Christmas is not a traditional holiday in China, and the response is pretty good. So we’re taking that to another level this year with covering the entire gamut from low-end meals at RMB35 to a bucket for families at RMB98. And with a lot of innovation taken from winning items from around the world. So, December, I think, for the Christmas promotion looks particularly strong, and that’s what gives us confidence in the balance of the quarter. So obviously, we can – we’ll report Q4 when Q4 has done. But at this time felt the incident we feel is behind us. The Golden Week is going quite well and the calendar looks very strong.

All right. Thank you. Next question please.

Your next question comes from the line of David Palmer with RBC. David, your line is open.

Thanks. Good morning. A couple of questions. The third quarter China restaurant margins were very close to peak levels even with well below peak AUVs. With the help of ongoing sales improvement and the VAT, where do you think margins can go over time for restaurants in China? And using your previous comments, just a quick clarification on the cash back to shareholders, it looks like you’ve got almost $1 billion left, and I assume that that will go to the New Yum! and add to that the $4 billion less to get to your $10 billion target, it looks like you might have $5 billion over the next two-plus years. Is that right, and will that likely be share repurchase? Thank you.

Just taking the second part of that question, it’s correct I think we have about $900 million to return to shareholders for the balance of the year in terms of cash buybacks.

And some of that will be completed between now and spin and the balance of it will be after spin as well.

Right. I think our original guidance was, we get this all done by spin. But the spin has actually moved up a couple of months from when we thought it would be done at the end of the year. Then on the second question on margin – future margin guidance for China, obviously, we’re getting that that benefit as Ted mentioned that we estimate to be, at least, two points, of course, that’s going to help our margins. But at this point in time, we’re not going to provide margin guidance for next year. But I think as the China team becomes a separate public entity they will certainly providing more detail on those kinds of issues.

Great. Thanks.

Your next question comes from the line of…

Yes, just to add to that David on the profitability overall for the quarter and even though the sales were not where we wanted them, operating profit grew very well. And our cumulative operating profit in three quarters was about equal to what we did in all of last year. So in some ways, the fourth quarter profit is going to be growth. And that’s a big credit to our teams, where as you know, we own our entire supply chain and control it very carefully. So we have very good control on input, taxes, et cetera, and that’s all helped us to get strong margin profit performance.

Thank you. Next question please.

Your next question comes from the line of David Tarantino of Baird. David, your line is open.

Hi, good morning. I have a clarification question on the recent sales trends we’ve seen in China. Micky, do you think the issue around the protest is still impacting the sales? I know you mentioned sales are modestly negative quarter to-date. Is that issue still lingering, and if so how are you measuring that and what do you think the underlying trend really is quarter to-date?

Well, we’ve done two rounds of research where we actually measured sentiment and we had percentage of consumers reporting less inclination to go to one of our restaurants on account of the protest specifically, that number came down for us sharply. Now remember, the quarter-to-date includes all of September. And with that month gone behind us, I think, it’s safe to say that the protest impact is now is very small, if not negligible. So I think that we can put behind us now. It always takes a little while to regain momentum once you get going in operations and everything else. So this October holiday is going to be quite crucial and determining that and our intention then is to keep the momentum.

Great. And then maybe just a quick follow-up. You mentioned, I think David mentioned in his script that there was some investments in driving sales planned in the fourth quarter. I know you mentioned some of these promotions, but can you maybe elaborate on what the investment side of that equation looks like?

Yes, we expect our overall A&P to be at the same level that we had always budgeted. We have made, because we had this margin benefit. We did invest some of it back. Some of it has gone into increasing – increase advertising spend on Pizza Hut. We think Pizza Hut got a good chance to recover momentum. We got soft laps for the fourth quarter. And we’ve got some very good promotions in November and at Christmas, and we’re putting additional money and advertising promotion behind those. We’ve also got some unique China only deals with international IP on films, movies. And also, we’ve got maybe three of the best celebrities available in China across the two brands, so that’s what we’ve made investments. But it’s all within what we’d originally budgeted. So if your question implies that there will be any deterioration and profitability on account of that, that’s not going to happen.

Thank you.

Key leverage will still be sales and that’s what we’re focused on.

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

Hi, good morning. This is actually Greg Lum for Karen today. I was just wondering if you could provide a quick update on the pace of remodels in China? And then based on the current units, what is the current average sales lift that you are seeing?

Sure.

October 11, we’ll give a lot more detail. I don’t have the number off the top of my head, but maybe Ted you can help. We have accelerated the rate of refurbish very quite dramatically, and we’ll give you more numbers on the 11th. And I think what happens with refurbish is that, it’s very difficult to quantify exactly the impact until you the get estate fixed. And when a certain percentage of the estate becomes current, then you get quite a substantial benefit, and that’s what we’re expecting in time to come. We’re very keen to keep the estate current, because China architectural standards, especially in the bigger cities have gone up dramatically over the last several years with a lot of international entries, and we have been left behind a little bit. So that has been corrected quite substantially.

Sure. On the remodels, we’re planning to do about 780 remodels this year, and this is going to be about a 50% increase versus what we did in 2015. And year-to-date, we’ve completed a little over half. I think, we’d say, we’re getting great feedback from our consumers. We contemporized the experience. We’ve made the restaurants more youthful, more energetic. And overall, I think, it’s a very positive effect on the image of the brands, and we’ll give you more updates at our conference next week.

Thank you, Ted.

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

Great. Thank you very much. Just two questions. One, maybe David on the New Yum!, I mean, just looking at the operating margins this past quarter for proxy, I mean, they expended a couple of hundred basis point at each brand despite the mixed results and you are running from the low to the high 20% range in each of those brands. I’m just wondering directionally perhaps how you think about the opportunity there with presumably the re-franchising? I mean, it seems like there is modest further re-franchising from here, but where you think those margins or what gating factors are there on that margin? And another question, Greg, just on Taco Bell, I mean a very strong result and it sounds like you attribute most of that to product news and more so on the value front. So with that as a backdrop, I’m just wondering whether Taco Bell still aspires for more of that premium push and why you think the QSR category has been sluggish recently? I think you mentioned the category softness. I’m just wondering what you attribute that to? Thanks.

Yes, the first question on operating margins, obviously, as we move to an asset-light model, we’re excited about its signification expansion in our operating margins. We’ll give you a lot more color on the exact refranchising plans and how that would play out in terms of operating margin next week. And I’ll turn it over to Greg for the second question.

I think Taco Bell is doing a lot of things right. It’s not just the core product, it’s not just the great value. Their assets are in great shape. The customer experience they’re delivering is really, I think, as good as you’ll find in the marketplace. They’re obviously trying to make – this is becoming a incredibly culturally relevant brand, I think being a part of a millennial culture is what’s really driving this performance. So I’m very excited at all the things they’re doing, I think sets us up for a continued long-term growth just across the broad front of all the things you want great brands to be doing.

And in terms of the sluggish category, any thoughts on what you can attribute that to or?

Sorry. Look, it’s hard to say that. We’ve been doing a bunch of work just talking to different to millennials, Gen X, Gen Y, Boomers. I think where we’re what five weeks away from a general election, I think there’s just great uncertainty as to what’s going to happen in the U.S., in particular, as a result of the outcome of the election. It goes without saying that people are sort of trying to decide who to choose and what the impact will be on the economy. And I think people maybe just hunkering down a little bit. But that said, that’s why I think I’m even more pleased with the performance of KFC and Taco Bell in the quarter, because despite that uncertainty those two brands, I think, in being incredibly distinctive and disruptive and going back to the quarter, delivering great experiences, making sure the value was right. Those – that’s how you win even in a sluggish market. And I think there are lessons that we’re also applying around the rest of the world. I mean, KFC outside of the U.S. had a – had just a gangbuster quarter probably with the exception of Japan, developed markets, developing markets. You can ask me any country, and I’ll show you incredible sales growth. So I think the global growth of the KFC brand and the momentum it has and the strength that we’ve now got in the U.S. sets that up for particular strength. Taco Bell, as I said across all the fact that you want to a brand to be strong at is just paring ahead. And I think once we get through the election and then that uncertainty is removed, hopefully, the market will find some momentum. But I’m really confident that our brands can grow in either strong markets or markets that don’t have the momentum we’d love to have.

Thank you. Next question please.

Your next question comes from the line of Matt McGinley with Evercore ISI. Matt, your line is open.

My question is on the full-year guidance of 15% for operating profit growth. I know that includes the 53rd week, which I think at the beginning of the year you said was around 1.5, China for the full-year, I think, you said would be 20 and you always have that fourth quarter step down just based on seasonality, and I think you said the full-year would be 17. So my question is on the New Yum! Business, which they’ve been running 9, 4 and 4 respectively for the three brands, you are going to have a step-up, part of it’s going to be from the 53rd week, but there’s also something else in there that I think implies you’re going to have a bigger step-up. And I guess, my question is what inflects within the New Yum! outside of the 53rd week to get you to that full-year 15% operating profit guide?

Well, I guess, we’d always anticipated the fourth quarter to be the best quarter of the year in terms of core operating profit growth. And that gets into a lot of features of our business performed last year expenses that we’re lapping and things like that. I can’t give you a precise answer other than to say the guidance was raised, because we do feel confident that the fourth quarter with the momentum that our brands have and the plans that we have in the fourth quarter and how they’re tracking against those plans gives us lots of confidence and our ability to generate more profit than we thought this time last quarter.

Thank you. Next question please.

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

Thank you. Just to clarify, was Taco Bell traffic ex-breakfast positive? And then my question was Taco Bell performed well on a difficult industry backdrop and obviously the competitive promotional environment continues to be pretty fierce. But I was wondering about the decision to launch a $1 all day menu as you guys seem to be seeing success with the $5 box strategy and, Greg, the core value strategy you outlined earlier. Presumably, these $1 menus, obviously $1 offerings have better margin – excuse me, the obviously, the core value offerings seem to have better margins than the $1 menu deal that you would be launching in the context of an inflationary labor environment?

So I guess my answer is, I think transaction would have been slightly positive. Obviously, we had a significant growth, as we said in breakfast, but I think without breakfast, transactions would have been slightly positive. I think the key to Taco Bell success it’s just not just the one show pony. We didn’t just do dollar menus. We also did Triple Double Crunchwrap in $5 boxes. So I think it’s our ability to have great value and value isn’t just what you pay, it’s what you get. And I think if you look at what’s in the boxes, or if you look at now the Sony promotion we’re doing right now, which from the millennial point of view, it’s an incredibly attractive promotional offer. I know the Sony boxm, the team is very happy with performance of the Sony box as we go into the fourth quarter, which is why we said we have momentum. So I think transactions were probably slightly up, ex-breakfast margins in the quarter, I think, we’re well over 21% close to 22%. I’ve been talking with some Taco Bell franchisees, I can assure you they love those sort of margins. And I think, as I see it with the work that Brian and the team is doing, we’re set up for continued success at Taco Bell going forward.

Thanks.

Thanks. And next question please.

Your next question comes from the line of Brett Levy with Deutsche Bank. Brett, your line is open.

Good morning. Can you dive a little bit deeper into the U.S. competitive landscape? Obviously, we’ve talked about value and premium, but what are your thoughts with respect to traditional and non-traditional competition, especially with all the talk that’s going on about food at home and away from home deflation?

Yes, look, I think we’re all reading the same reports, whether they’re industry reports or the newspaper, or what’s online. There’s no doubt that food from the grocery stores has declined. But not to say therefore some people aren’t choosing to cook more at home. I think the fundamentals of what QSR office, which is always convenience and value will always be there. And as I said, in any market strong markets or sluggish markets, there always be winners and losers. And I think, having the right tactics in order to ensure that you win is, what’s critical. And obviously, in the quarter, two of the brands delivered and we’ve got lessons from that. And I’m very confident that we can continue to apply those lessons to KFC and to Taco Bell and that we can apply those lessons to Pizza Hut. And there will be a lot more on the Pizza Hut story, but we’ll talk about next Tuesday. And I know that Pizza Hut team is looking forward to telling you about their plans to reignite growth in that brand as well.

Thanks. My next weekend is…

Next question, please, sorry.

Your next question comes from line of Dennis Geiger with UBS. Dennis, your line is open.

Hi, thanks for the question. Greg, off the back of what you just said about Pizza Hut and more detail next week, is there anything that you can share on the strategy in the U.S.? Specifically, if you could provide the US company-owned number relative to the system, which I think you provided last quarter as a way to kind of seize some of the traction from the initiatives? And anything you can share on the easy and better initiatives or the local value message would be helpful? Thanks.

Yes, sure. Well, I think the good news is next Tuesday Artie will take you through a lot about the whole easy and better strategy for the U.S. And obviously, Milind will talk about what’s happening internationally. What I can tell you is during the quarter, the company same-store sales were 3 points ahead of system and transactions were 6 points ahead of the systems. So again, the company outperformed the system. And obviously, we’re working with the franchisees to bring them along to sort of deliver that improved performance across the entire brand.

Thanks. We have time for one more question please.

Your final question comes from the line of Jeremy Scott with CLSA. Jeremy, your line is open.

Hey, good morning. Can you update us on the competitive activity in the O2O space in China? I have to assume that after about two years or so promotions and consolidation that within the industry these offers and incentives would start to wind down. So if you could just comment on that? And then secondarily, what percentage of your system sales are now moving through delivery channels? And then what percentage of those delivery sales are moving through the third parties?

Yes. Well, I think the space is still growing. We track – we repeatedly practice through industry monitors as well as we are looking at it very closely just internally to make sure we don’t miss an opportunity. The gross merchandise volume is still growing. For us, the total delivery volume is approximately 10% of our sales, so circa $600 million, $700 million a year will go through delivery. The percentage that goes through aggregators, I don’t have, it’s not a very large percentage of what we have. Pizza Hut dine-in is significant and will grow through aggregators. But for the rest of it, it’s mainly our own delivery systems. We are listed with the major aggregators. So we are present in all of them. It is true that there has been a lot of fallout, because in profitability of the aggregators reportedly is very negative. So, of course, the big three companies will still continue to support their delivery engines. But the rate of discounting, et cetera, I think has moderated over time. But it’s still is a growth area.

This concludes our question-and-answer session. I would now like to turn the call back over to Keith Siegner for closing remarks.

All right. great. Thank you, everyone, for joining us on the call today. Once again please remember to mark your calendars for upcoming Analyst Investor event. We look very forward to speaking with you next Tuesday. Thanks.

Thanks for being on the call everybody.

This concludes today’s call. You may now disconnect.