Good morning. My name is Zitania and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands Q4 2018 Earnings Release Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Now, I would like to turn the call over to your host, Mr. Keith Siegner, Vice President, Investor Relations, Corporate Strategy and Treasurer. Sir, you may begin your conference.

Thanks, Zitania. Good morning, everyone, and thank you for joining us. On our call today are Greg Creed, our CEO; David Gibbs, our President, Chief Operating Officer and Chief Financial Officer; and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from Greg and David, we'll open the call to questions. Before we get started, I'd 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 Investors 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. Please note the following regarding our basis of presentation for today's call. First, system sales results exclude the impact of foreign currency. Second, core operating profit growth figures exclude the impact of foreign currency and special items. And third, the revenue recognition accounting standard was prospectively adopted on January 1. As a reminder, this is a GAAP required change adjusting the timing of recognition of upfront fees received from, and incentive payments made to. franchisees, the effects of which have no impact on cash. In addition, it requires the gross-up of revenues and offsetting expenses of advertising funds we consolidate within our income statement. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording. We'd like to make you aware of the following changes in upcoming Yum! investor events. Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10-K filing. First quarter 2019 earnings will be released on May 1, 2019, with the conference call on the same day. And, last, we ask that you ask one question and one question only. Now, I'd like to turn the call over to Mr. Greg Creed.

Thank you, Keith. And good morning, everyone. It's been a little over two years since we announced a substantial transformation of Yum! Brands and I couldn't be more proud of what we've been able to accomplish since then. Focus on our four growth drivers, increased collaboration and a new mindset are clearly fueling improved results. In aggregate, for the year, Yum! delivered system sales growth of 5%, with 2% same-store sales growth and 4% net new unit growth excluding Telepizza units. Additionally, 2018 was a year of significant milestones in bold restaurant development. We now have over 48,000 restaurants in approximately 270 brand country combinations. Together, with our world-class franchisees, we opened on average 8 gross restaurants per day. Or in other words, one restaurant every three hours. As for the fourth quarter, I'm thrilled to share details of such a strong finish to a solid year. Items to note include a tremendous quarter at Taco Bell where same-store sales grew 6%, another impressive quarter at KFC where same-store sales grew 3% and a continued slow and steady improvement at Pizza Hut US with 1% same-store sales growth. Now, into the final year of our transformation, we continue to focus on our four key drivers to accelerate growth. As usual, David and I will talk you through the lens of these four key growth drivers. I'll provide an update on our distinctly relevant and easy brands, as well as unrivaled culture and talent. Then David will discuss bold restaurant development and unmatched franchise operating capability. He will also discuss our 2018 results, 2019 guidance and progress towards our transformation commitments. I’ll begin with our three distinctive, relevant and easy brands. In the fourth quarter, KFC division delivered system sales growth of 7%, with same-store sales growth of 3% and net…

Thank you, Greg. And good morning, everyone. Today, I'll discuss our full year and fourth quarter results, progress towards our transformation initiative and two of our four growth drivers – old restaurant development and unmatched franchise operating capability. First, our 2018 results. I'm thrilled that we met or exceeded each component of our guidance, particularly reaching the high end of the original range for net new unit growth, which I’ll talk about more in a few minutes. Our consolidated same-store and system sales growth rates improved throughout the year, ultimately achieving 2% and 5% respectively. In fact, I'd like to note that system sales growth ex-FX was 6% at KFC and 6% at Taco Bell, both impressive accomplishments. As a reminder, two items weighed on our core operating profit results. The timing mismatch between G&A savings and refranchising and the revenue recognition accounting standard change. As a result, and in line with our expectations, core operating profit growth for the full year was flat. As we anticipated, the second half of the year was better than the first. Fourth quarter system sales growth of 6%, same-store sales growth of 3% and core operating profit growth of 5%. Each a peak quarterly result for the year. Taco Bell was a major contributor to the quarterly improvement, with a 9% system sales increase driven by an impressive 6% same-store sales growth. Not to be left out, KFC, our largest division in units and profit contribution, ended the year on a high note with 3% same-store sales growth and 5% net unit growth, driving 7% system sales growth in the quarter. Before moving on, just a quick update on the impact of our Grubhub investment on EPS. Net for the full year, the mark-to-market of our Grubhub stock had a positive $0.03 impact.…

[Operator Instructions]. And your first question comes from the line of Dennis Geiger of UBS.

Great, thanks for the question. David, congratulations on your promotion. Just wondering if you could just spend a bit more time talking about the accelerated unit growth potential for the business going forward? Another good quarter and good year of growth. Maybe just a bit more on the confidence going forward, which regions may be, to some extent, if you could talk high-level, that comes from – is it going to look a lot like it did in 2018? And just whether or not there are any other macro challenges and certain parts of the world had any kind of impact on your expectations? And then, I guess, just the last part of that, obviously, Telepizza just closing now. But just given the experience thus far, just checking in on your appetite to do more acquisition and conversions potentially in the future across brands. Thank you.

Well, thanks, Dennis. Yeah, I think, obviously, development is becoming a bigger and bigger part of the Yum! story. So, let me give you a little more color on it. Our guidance for 2019, as you know, is 4% as that's clearly the most likely outcome that we see. Embedded within that guidance as normal is tailwinds and possible headwinds. From a tailwind standpoint, and getting at your question about regions of growth, we are really encouraged by the fact that we're seeing widespread development. If you look back at years passed, a lot of our successful years in development, none of which reached the levels we reached this year, were driven by China. But this year, China has played a much smaller role in us achieving what is a record for Yum! on units. That's because, around the world, we are seeing good unit-level economics, which is driving our franchisees to build more stores. We're spending more time supporting them in this effort and making sure that we’re picking the right locations with more sophisticated market planning tools and being as efficient as possible with our capital spend. So, we've got some great tailwinds and as the development program is becoming more widespread and cuts across really just about every market that we operate in. As far as possible headwinds for 2019, we have this transition of the Pizza Hut dine-in estate to more of a delivery-focused estate and, obviously, that involves closing and opening stores. And during that churn, we may see more closures perhaps than we anticipated in the short-term at Pizza Hut. So, that's something as a possible headwind that we'll keep our eyes on. And then, I guess, the other possible headwind, for those of you who listened to the Yum China call, is their…

Next question please.

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

Thanks. Good morning. Can you just talk a little bit more about the strength in the Taco Bell business? The QSR industry trends just were not that strong in the third and fourth quarter, but Taco Bell is clearly a standout. Is your breakfast business performing exceptionally well? Is that where you're taking share? Or if you could just maybe describe again in more detail the pockets of strength in the Taco Bell business as you see it?

Yes. Sure, Brian. I think to reflect on what David said, this is the seventh year of positive same-store sales growth for Taco Bell. So, the success of Taco Bell has been in place for a long time. Obviously, we had an acceleration in the back half of the year. We had 6% same-store sales growth for the back half and, obviously, a 9% system sales growth is a great number to finish the year on. There's no silver bullet. That team, led by Julie Masino, is just doing a great job across the board. We are known as the value leader. We are known as the innovation leader. As David said, we're running great operations. The assets are in great shape. The franchisees like their restaurant-level margins. And so, I think when you add all that up, you just get a performance – a consistent performance for the seven years that Taco Bell has delivered and we believe will continue to deliver. So, the brand is in great shape. Even the delivery advertising which will launch today, I had a chance – we were at a Taco Bell a couple of weeks ago. I've seen all the marketing around the advertising supporting the Grubhub launch. It's as good as any work I've ever seen come out of Taco Bell. So, if we can accelerate our growth in delivery, I think that's all positive. So, they're just doing everything right led by a great executive team and a great president.

Your next question comes from the line of Chris O'Cull with Stifel.

Yes, thank you. My question relates to the Grub partnership. Greg, are there any differences in the consumer experience between Taco Bell because of their partnership with Grubhub compared to maybe other fast food chains that have relationships that aren't as close to their third-party provider? And then, also just wondering why KFC has been a little slower to rollout delivery than Taco Bell and whether you believe it can be as impactful to KFC as Taco Bell?

It’s like everything. You have to put the foundations in place before you let the, I guess, the horses loose. In this case, getting POS integration in place is really important. And so, obviously, we've spent a lot of time with Taco Bell and Grubhub getting the POS integration done. That's now complete and that's, obviously, why we're launching it. Working on the KFC team to make sure that integrated first. We don't want to go out and blow out without the integration because we know, with great integration, it improves speed of service, it improves order accuracy, it does everything that the customer wants. And so, you can say we've got a little slow. I would say we've gone a little slow early in order to accelerate going forward. So, I'm very excited about the launch day for Taco Bell. I'm very excited that more KFC restaurants will come onboard before the end of 2019. And all indications are, certainly in the early days, higher check, incremental transactions, all of that bodes well for both brands in the US.

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

Thank you. And, David, congrats on a well-deserved promotion. I know you've talked about Telepizza's neutral impact expected to 2019 EPS, but can you walk us through the mechanics of this? Presumably the system sales will grow with roughly, as you finalize at 1,100, 1,200 new stores, is the expectation that this will be offset by a pronounced deterioration in the effective Pizza royalty rate or, separately, can we expect elevated franchise and license expenses or elevated G&A to lead to the EPS neutral impact?

The impact on profitability being neutral is really from the fact that we are contributing into this alliance some of our Pizza Hut's franchise stores today and, therefore, we're reducing the royalty we collect from those stores. So, we get less royalty from the stores we're contributing, we get the royalty from the stores that Telepizza is contributing, and effectively, from a rounding standpoint, it's neutral. We do think, long-term, it will be accretive because we think it will accelerate the rate of our growth. And to your question about G&A, obviously, most master franchise agreements, the master franchisor, in this case Telepizza, actually carries the G&A to manage the business. That's why we take a lower royalty. So, we don't expect any increase in our G&A. In fact, it would be the opposite. Our G&A over time will go down covering those areas as Telepizza gets up to speed on the business.

Thanks. Operator, we have time for one question.

Your final question comes from the line of Gregory Francfort of Bank of America.

Thank you. And just, David, can you talk about – as you've taken on the new responsibilities – what your key priorities will be and where you see the biggest opportunities for the business?

Yeah. As I shift to more of this President and Chief Operating Officer role, my priorities are the business priorities. We've transformed this business to being more a franchise business. Obviously, franchise unit economics are at the center of everything we do and I want to make sure that we're transitioning the way we approach the business, and we are seeing evidence of this everywhere we go, so it's not a concern. But I want to make sure we complete this journey to being a world-class franchisor, putting our franchisees, their unit economics, front and center at everything we do. So, I'll be spending a lot of time in the field with our field teams and with our franchise partners as I get up to speed in the new role in 2019 doing just that. I think the business is in great shape, obviously. I don't have an agenda for massive change. We are on the right path. And I think Greg and I and the entire Yum! and brand leadership teams are really excited about putting a bow on a good 2018 and moving into 2019 with some momentum. I'll turn it over to Greg now for just a few closing comments.

Thanks, David. So, first of all, I want to thank everyone for being on the call today. We are proud of what our teams and our franchisees accomplished in 2018. Combined, we opened up more than 300 more organic restaurants in 2018 than we did in 2017. We closed [indiscernible] transformative deals that should drive profitable system sales growth for our franchisees, Grubhub, Telepizza, QuikOrder. We made material progress on all of our 2016 transformation goals, including, as we have said, completing our refranchising program. I'm pleased to add that we closed out 2018 on a high note with Q4 being the best quarter of the year in terms of same-store sales growth, system sales growth, and core operating profit. So, heading into 2019, we remain confident we are going to deliver on becoming a more focused, more franchised, and more efficient, all of which will deliver more growth and further strengthen our powerful and unique business model. Thanks for joining us on the call today.

Thank you, everyone.

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