Yum! Brands, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Yom Brands Q4 2019 earnings release. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone. Please be sure to limit yourself to only one question. Please be advised that today's conference call is being recorded. If you should acquire assistance from the operator, please press star 0. I would now like to hand the conference over to Keith Signer, Vice President Investor Relations, M&A, and Treasurer. Sir, please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us. On our call today are David Gibbs, our CEO, Chris Turner, our Chief Financial Officer, and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from David and Chris, 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 our earnings releases and relevant sections of our filings with the SEC to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call. We'd like to remind you that the Habit Burger drill transaction is subject to approval by their stockholders and other customary closing conditions. This transaction is expected to be completed by the end of the second quarter of 2020. As such, please understand that we are limited in what we can discuss on today's call. Please note the following regarding our basis of presentation. First, all system sales results exclude the impact of foreign currency. Second, Pizza Hut division and worldwide system sales include the benefit of the increase in units in the fourth quarter of 2018 related to our strategic alliance with TelePizza. Same store sales and net new unit growth reflects the inclusion of TelePizza in the prior year base. Third, core operating profit growth figures exclude the impact of foreign currency and special items. Fourth, the lease accounting standard was prospectively adopted on January 1, 2019. As a reminder, this is a GAAP-required change resulting in a recognition of operating lease assets and liabilities on the balance sheet. No significant impact in our income statement or cash flows as a result of this accounting change. And last, please note that the fourth quarter 2019 results include a 53rd week. However, figures stated on this call will exclude the 53rd week. 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'd like to make you aware of the following changes and upcoming YUM Investor events. Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10K filing. First quarter 2020 earnings will be released on April 29, 2020 with the conference call on the same day. Now, I'd like to turn the call over to Mr. David Gitz. Thank you,

Keith, and good morning, everyone. 2019 was a truly historic year for YUM. First, we successfully completed our three-year transformation and delivered on our bold commitment. Second, we surpassed two milestones that are a testament to YUM's incredible scale as we eclipsed $50 billion in system sales and marked the opening of our 50,000th restaurant. None of this would have been possible without our unrivaled culture and talent and over 2,000 franchisees who run 98% of our restaurants globally and employ more than 1.5 million restaurant team members. Because of our journey to become more focused, franchise, and efficient, we're now in a much stronger position to accelerate growth and improve franchise unit economics over the long term. Before I begin, I want to share a heartfelt thank you to everyone within the YUM family who made these results possible. I especially want to thank Greg Creed, who led YUM as our CEO for five years with his signature blend of smart, hard, and courage. I also want to thank Tracy Schemes, who was uniquely essential to this massive transformation. In her dual role as Chief Transformation Officer and Chief People Officer, Tracy helped shape YUM's direction all while working to make our culture more collaborative and inclusive and getting us in the best position to expand our capabilities with new talent and strategic investments. As an example, on the talent side, in 2019, we elevated experienced YUM executives to critical global growth roles. Tony Lowings to KFC CEO, Artie Starr to Pizza Hut CEO, Gavin Felzer to Chief Strategy Officer, and Nikki Lawson to Taco Bell Chief Brand Officer. We also brought in fresh thinking and capabilities from outside YUM with Chris Turner as YUM's CFO, Mark King as Taco Bell's CEO, Clay Johnson as Chief Digital and Technology Officer, and more recently, Shannon Hennessey as KFC Global CFO. In addition to our talent moves, we made bold strategic investments that leverage our scale. For example, our U.S. partnership with Grubhub, Pizza Hut's acquisition of Quick Order, and our growth alliance with TelePizza. And as we started 2020, we built on this momentum by announcing our plans to acquire the Habit Burger Grill, a fast, casual, trend-forward concept with tremendous growth potential. I'm proud of what we've done during this time of transformation and couldn't be more excited about where we go from here. Now I'd like to share with you a few thoughts on our future direction. One, it's clear that how we get results in today's world matters more to our customers, employees, and investors than ever before. So you'll hear us sharing more about our recipe for good that outlines our sustainability commitments on our food, planet, and people. As such, the guiding purpose for young brands will be to unlock potential for both growth and good. We'll remain committed to the four growth drivers and plan to deepen our execution with new strategies and tactics within each one. Two, to grow, we must deliver a consistently positive customer experience wherever we operate. Only the best brands in QSR will thrive and be relevant for the next generation of consumers. As CEO, I'm committed to elevating the experience for each of our 40 million customers every day and achieving the kind of unit economics only made possible through exceptional talent, industry-leading operations, innovative technology, and modern assets. Three, with more restaurants than any other company, we must leverage our scale and technology to create sustainable competitive advantages and growth for our franchisees. You've already seen us take steps in this direction. As previously announced, Clay and Gavin are leading a cross-brand effort that embraces disruptive innovation, harmonized platforms, advanced data analytics, and emerging technologies to transform the customer and employee experience. We'll also continue to consider acquisitions and strategic partnerships that allow us to unlock value and expand our capabilities. Four, because our unrivaled culture and talent is a huge competitive advantage, we're going to continue investing in developing the best leaders and restaurant general managers around the world. We will dial up our efforts on diversity and inclusion with a focus on gender parity and underrepresented minorities. In summary, our brands will focus on unlocking our potential with better experiences for our customer employees, which will ultimately lead to better franchise unit economics and better growth. I'll now share our overall view of our results for Yum and a red brand update. Then Chris will share the details of our fourth quarter and 2019 results, 2020 guidance, as well as an update on bold restaurant development and unmatched franchise operating capabilities. Let's talk about 2019 results. Overall, Yum delivered a strong year with system sales growth of 8%, with 3% same-store sales growth and 4% net new unit growth. Starting with same-store sales growth, Taco Bell and KFC were standouts this year with 5% and 4% respectively. For bold restaurant development, 2019 was a record-breaking year and I'd like to recognize the efforts of all involved and put it into context. As I previously mentioned, our global system surpassed 50,000 restaurants in 2019. We accomplished this by opening a record 2,040 net new units, which represents a 70% increase versus 2016 when we began our transformation. We opened, on average, 9 gross restaurants per day in 2019 and now have an unmatched 287 brand-country combination. I believe our enhanced focus on bold restaurant development resulting from our transformation enabled us to accelerate unit growth and achieve this milestone. Now for our three red brands. KFC division finished the year strong. In the fourth quarter, they delivered system sales growth of 8%, with 3% same-store sales growth and 7% net new unit growth. For the year, system sales grew 9% with 4% same-store sales growth and 7% net new unit growth. KFC International's results are truly remarkable with strong performances across the board. India had another exceptional quarter with 12% same-store sales growth, ending the year with 10% same-store sales growth. Their momentum is attributable to always-on marketing around value, innovation, and expanding their digital channels. Our Middle East business unit was another top performer in Q4 with 11% same-store sales growth. In the U.S., same-store sales growth grew 1% in Q4. KFC U.S. continues to partner with Grubhub to add locations for delivery and click and collect. We now have over 2,800 locations offering delivery and 3,800 restaurants available for click and collect. In conjunction with the launch of KFC.com in October, we're excited about the operational ease this provides to our team members and customers. Moving on to the Pizza Hut division, fourth quarter system sales growth was flat, excluding the benefit of TelePizza, with a same-store sales decline of 2% and 1% net new unit growth. For the year, system sales grew 2%, excluding the benefit of TelePizza with flat same-store sales and 1% net new unit growth. Pizza Hut U.S., which represents 8% of Yum's operating profit excluding corporate and unallocated items, reported system sales and same-store sales declines of 4%, with a 2% net new unit decline in the fourth quarter. Pizza Hut U.S. continues to be a business in transition, and for the last three years we've made improvements in food quality, speed of service, our loyalty program, and upgrading our technology for online ordering and delivery. However, significant opportunity remains in three years. First, more consistent execution in our customer experience across delivery and carryout. Second, ensuring we have value promotions that truly resonate with consumers and that are consistent with the long-term, profitable unit economic model. Third, in remodeling and relocating the assets. We are urgently taking steps to change the trend and are working internally with our franchisees to place the brand on firmer footing to grow. To start, we've injected new leadership and talent. We've added KFC U.S. President Kevin Hockman to the Pizza Hut U.S. team as interim president. We've also leveraged Yum's deep global talent pool to add a new chief brand officer and chief marketing officer. Kevin's turnaround experience in both CPG and KFC U.S. and his proven ability to improve distinctiveness of brands and accelerate innovation make him ideally suited for this opportunity. Kevin and team are working closely in partnership with our U.S. franchisees, many of whom have the capital capability and commitment to continue driving this turnaround. To be clear, as we work with our franchisees through the turnaround, we have a few guiding principles. First, we are a growth company and expect that all of our brands can and should grow. Second, we remain committed to an asset-like model and disciplined spending. Third, we know the formula for success. In markets where we deliver a great customer experience with a best tasting pizza, unbeatable value, distinctive food innovation, a best in class digital experience, and modern assets, we grow sales consistently. At Pizza Hut International, system sales grew 13%, including a 9-point benefit from Telepizza, with flat same store sales growth and 4% net new unit growth in the quarter. The same store sales gap between the Dine-in channel and off-premise sales was approximately 3% this quarter, meaning our off-premise performance remained healthy at a positive 2% same store sales growth. Europe was the main driver of the quarter's performance, delivering 3% aggregate same store sales growth, led by strength in the UK delivery business. During the year, the UK, Brazil, Germany, Australia, and Spain were the primary contributors to positive same store sales growth and showed significant improvement in value, the introduction of aggregators, and product innovation. Turning to Taco Bell, 2019 marked our eighth consecutive year of positive same store sales growth, a testament to the power of the brand and excellent customer experiences delivered by our world-class franchisees. Fourth quarter system sales grew 7%, with 4% same store sales growth and 4% net new unit growth. Taco Bell is a great example of what it means to be a red brand. The all-new toasted cheddar chalupa was introduced in the fourth quarter, delivering the innovation that Taco Bell is known for and generating a solid sales mix of 10%. We also brought back the very successful $5 nachos box and ended the year with the perennial fan favorites, the Xbox Gaming promo box and Roll of Chicken tacos. 2019 marked the completion of the nationwide kiosk rollout to nearly 6,500 restaurants. Kiosks deliver a modern and easy interface that allows our customers to explore the menu and customize their favorite items. We continue to see meaningful checklists and growing utilization. From kiosks to grubhub delivery in over 5,100 restaurants to e-commerce nationwide, Taco Bell continues to leverage technology to become easier and more relevant to ultimately drive sales. Internationally, we continue to have strong sales momentum for the year, with highlights including India, Canada, Japan and Europe. We made strides in our all-access initiatives this quarter, including piloting loyalty in the UK and adding kiosks in four markets, including the UK, Spain, Australia and New Zealand. Before I turn it over to Chris, I did want to note that our thoughts are with everyone affected by the coronavirus situation. We're obviously following this closely and I've been in regular contact with Joey Watt, the CEO of Young China. I know she and her entire team are doing everything they can to work with local health officials and the government to help ensure that they protect their employees as well as their customers. The Young Foundation is matching their relief efforts with donations that will provide support, medical supplies and masks to the affected areas in China and assist frontline healthcare workers involved in fighting the epidemic in Wuhan. While Young's business model is highly diversified such that the impact on our financial performance won't be as significant as what many companies will experience, this will certainly be a headwind for 2020. At the end of the day, this is a business built on people and the health and safety of those people will always be our top priority. With that, I'll hand it over to our CFO, Chris Turner.

Thank you, David, and good morning everyone. Today I'll discuss our fourth quarter and 2019 results, 2020 guidance and our remaining growth drivers. During the fourth quarter, we delivered system sales growth of 7%, same store sales growth of 2% and net new unit growth of 4%. As expected, growth in the second half of the year was lighter than the first, but was still consistent with our long-term growth model. Standouts for the quarter included KFC with 3% same store sales growth and a remarkable 7% net new unit growth. And Taco Bell also had another great quarter with 4% same store sales growth and 4% net new unit growth. This performance translated into core operating profit growth of 9% for the quarter. Next, I'm excited to say that we achieved or exceeded each component of our 2019 guidance. First, and as David mentioned, our consolidated system sales growth was 8% with 3% same store sales growth and 4% net new unit growth. KFC and Taco Bell both met or exceeded our long-term target of -3% same store sales growth, bringing the aggregate YUM figure to the high end of our -3% range. We also had our second consecutive record-breaking year for development with 2,040 net new units. Second, we met our full-year core operating profit growth guidance of low double digits. Core operating profit growth for the year was 11%. Third, net cap ex for the year was $86 million, which was slightly below our guidance for 2019 owing to generally tight controls over all buckets of spend. Fourth, we met our target for G&A at .7% of system sales in 2019. After running below our guidance through the first three quarters, in the fourth quarter, aggregate G&A was above that three-quarter run rate, primarily owing to a few factors. Our strategic investment spend was heavily back-end weighted, commensurate with timing of our new talent appointments. Additionally, we had some discrete spend, including strategic projects, the largest of which was related to global tax reforms, that was concentrated in the fourth quarter. Boiling it down to exclude the 53rd week and discrete, non-recurring items, the 2019 base you should use to model 2020 G&A all above is about $900 million. Lastly, EPS. We met our goal to deliver at least $3.75 in 2019 adjusted EPS, which we introduced in 2016. While our gap diluted EPS was $4.14, the -to-apples comparison to the $3.75 figure was $3.80. Please see our earnings release for reconciliation of our gap reported results to the adjusted EPS figure. Next, guidance. Our long-term growth model remains unchanged. We continue to believe that -3% same-store sales growth should complement 4% net unit growth for -to-high single-digit system sales growth. Add in leverage, and we believe long-term core operating profit growth should be high single digits. However, as it pertains to 2020, first, that the lap of the 53rd week represents a $24 million headwind, or just over 1%. Additionally, there are a few matters adding uncertainty to the outlook for the full year. Most importantly, the impact of the coronavirus in China and the potential for it to impact surrounding areas in Asia and other parts of the world. In addition, there is potential for choppiness in near-term results at Pizza Hut US, primarily related to our largest franchisee. Given the fluid nature of these issues, specific forecasts for impacts are challenging at the moment. However, we believe it prudent to plan our business to account for these risks. As such, we are currently basing our 2020 plan on the assumption that we will likely be below our long-term algorithm on a 52-week equivalent basis. We will update you as the year progresses and we have more information. A few other items. First, we estimate CapEx net of refranchising proceeds in the -$150 million range in 2020. Second, we believe 5x net leverage remains an appropriate and balanced target. Third, in relation to dividends, our long-term target payout ratio remains -50% of annual net income excluding special items and Grubhub -to-market. In fact, we are pleased to have recently increased our quarterly cash dividend 12% to 47 cents per share. Going forward, we plan to return the excess cash remaining after CapEx, dividends, and select shareholder accretive investments through share repurchases. One last note with regard to our guidance. For the last few years, our reported effective tax rate has benefited from deductions associated with stock-based compensation exercises. While the timing of the exercises as well as the exact amount of benefits are very difficult to forecast, we believe it is prudent to assume less benefit going forward, partly because of deductibility changes in light of U.S. tax reform. Thus, we are now forecasting our effective tax rate to be within a range of 21% to 23% versus the 20% to 22% range we forecasted previously. In January, we announced our agreement to acquire the Habit Burger Grill for $14 per share in cash or a total of approximately $375 million. As Keith mentioned, the transaction is subject to approval. As it relates to the impact in 2020, we estimate minimal impact to non-GAAP earnings per share before special items, with accretion beginning in 2021 and increasing thereafter. Now, let's discuss our remaining road drivers. I'll begin with bold restaurant development. This is perhaps the clearest example of how focus and a new mindset can generate improved results. During 2019, we opened 3,332 gross new restaurants and 2,040 restaurants on a net new basis. This is truly a step change in pace. KFC finished 2019 with 669 net new units in Q4 or 1,483 net units for the year, which represent 349 more than 2018. This outstanding performance was led by China, our Russia business unit, Asia, Latin America, and Thailand, among others. In the U.S., we closed out Q4 2019 with over 2,200 American showman restaurants across the country, representing over 54% of the U.S. system. At Pizza Hut, the division opened 188 net new units during the quarter and 266 for the year, as headwinds related to the transition in the U.S. asset base partially offset international growth. Taco Bell delivered 172 net new units during the quarter. In the U.S., we opened our 60th urban-style Cantina restaurant. Internationally, 71 net new units were opened in the fourth quarter, including the entry of two new markets, Portugal and New Zealand. Internationally, we saw impressive growth in India, Spain, the U.K., and Thailand. The pace of global development continues to accelerate with 291 net new units opened this year, an increase of 30% year over year. Next, unmatched franchisee operating capability. Across each of our brands, we are working to enhance the customer experience. With ever-changing technology, we have to adapt with consumers to deliver a consistent interaction and positive response each time a person interacts with our brands. With that, we know how important it is to hear our customers and learn what we can do better operationally. At KFC, we've piloted customer feedback and survey models that are also integrated with our delivery aggregators in our Africa, Middle East, and Australia and New Zealand business units. At Pizza Hut International, we've focused on enabling both better customer experience and ease of operations to drive efficiency by rolling out driver tracking and operations management systems in six markets comprising over 600 restaurants. This will provide our franchisees with order sequencing intelligence, enabling them to more efficiently allocate resources. At Taco Bell, a focus on speed and operations continued to yield results. Q4 ended with 20 seconds faster service year over year. This translated to 9 million more cars through the drive-through in 2019. Great service is also key to the customer experience, and I'm pleased to report that while getting faster, all operations metrics improved across the board. To summarize, the transformation made Yum a stronger company, franchisor, and investment. With iconic category-leading brands and a uniquely diversified global business of over 50,000 restaurants, Yum is well positioned to accelerate growth and drive healthy franchise unit economics by leveraging our massive scale, expanding digital technology, and delivery. We look forward to updating you throughout 2020. Now, the team and I are happy to take your questions.

At this time, if you would like to ask a question, simply press star 1 on your telephone's pad. Please remember to limit yourself to one question. Your first question will come from the line of David Tarantino with Baird. Please go ahead.

Hi. Good morning and congrats on a good 2019. My question is about the U.S. pizza hut business. First, could you just maybe clarify your comment about the choppiness that you expect in 2020 related to your largest franchisee? Perhaps, what are the range of outcomes there that you're considering at this point? And then secondly, my main question involves around whether you're contemplating an injection of capital into the business, whether to support the existing franchise base in some way like you did with the transformation agreement. Thanks

for the question, David. Obviously, on Pizza Hut U.S., as we mentioned, we are focused on driving the turnaround in that business. As David mentioned, we're excited about the new leadership that we have in place there and their focus on the fundamental improvements to the business on both the way that we translate the brand to consumers and on the asset base. But obviously, there's a lot of work to be done there. You asked specifically about our largest franchisee. We typically do not go into detail on specific franchisee situations. But as we've discussed before on the asset side of the equation in Pizza Hut U.S., we are, the majority of our franchisees are really good partners. They are well capitalized, committed, and capable and continue to drive the business in the right direction. We do have a handful of situations where we are working with the franchisees to get them into a better place. Obviously, each of those processes take time and do create some choppiness as a result. As an example, we do have one market in the U.S. where we had a franchisee whose assets simply weren't up to our standard. We've worked with them to exit them from the system and we're well down a path to getting a new franchise operator into place. Hopefully, that gives you a general feel for the situation and why there may be some choppiness as we work toward a better asset base. I

guess what I would add, David, I know there's concern about injecting capital. I understand your question. In the past, we have done two transformation agreements, one with KFC U.S., one with Pizza Hut U.S. Those were done at a point in time in exchange for certain rights that we gained for Pizza Hut U.S. We got more marketing contributions and other rights related to operational standards. As Chris mentioned, that helps us in some cases actually shut down the market and get the market in the hands of a better operator. As I mentioned in my prepared remarks, we're committed to an asset-wide model. If we do something with capital, whether it be going out to buy the Habit Burger Grill or some kind of agreement with franchisees, that's done because there's some benefits to Young, but we are really committed to the asset-wide model. Next question, please.

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

Thanks very much. I did want to just ask a follow-up on Pizza Hut if I could. What was the bad debt expense in the fourth quarter? What have you baked into your model or how should we think about what bad debt may represent as a pressure on earnings in 20? Can you also talk about Kevin's early moves at Pizza Hut? What has he done? I understand maybe there's some change in pricing or franchisee's ability to change pricing. What are the things that early on he's really focused on specifically? I know driving sales generally, but specifically to help the brand?

Thanks. I'll take your first question and I'll let David follow on with some remarks. On the bad debt expense, if we step back and think about the context of Young globally, we collect north of $4 billion in royalties and other fees from over 2,000 franchisees around the globe. You're always going to have some situations that we are working through. There was an uptick in bad debt expense at Pizza Hut. Just to give you a sense for the numbers for the pizza division globally, in Q4, bad debt expense related to royalties and digital fees was $8 million for the division, which was up $4 million year over year. And for full year 2019, bad debt expense was $22 million, which was up $12 million year over year. To help put it into some context though, this was related to just a handful of franchisee situations. As I mentioned earlier, we are working through those. The timing of how the steps play out, there may be some bad debt impact as we go through that. That is part of the choppiness that we've described as we work through this. Hopefully that gives you a sense and helps to put it in the context of our global franchisee base and give you some point of reference for the numbers.

And then as far as Kevin Landy and Pizza Hut, obviously we are all excited about having somebody with his talents working on the Pizza Hut brand in the US. Kevin, as you know, as the CMO and then the president of KFC US, really architected the turnaround of that brand. Going back to the things that we know matter in our industry, having brand communications that resonate with consumers, that build the brand in a red way, offering the kind of value that appeals to consumers but that is also profitable for our franchise partners. And he's using that same playbook at Pizza Hut. It's obviously too soon to start to talk about the specific tactics that he's going to deploy, but I can say that a lot of franchisees reach out to me and say they're excited to have Kevin joining. He's spent a lot of time in the field with them, getting to know them and understanding their concerns. I think he's forming a good partnership with them and going to build on the great work that the Pizza Hut team has done in the last few years in strengthening the brand from a technology standpoint, launching loyalty programs, improving products, operational improvements, all the things that we've talked about in previous calls. Thanks, John. Next question, please.

Your next question is from the line of Dennis Geiger with UBS. Please go ahead.

Thanks. Just following another year of strong development growth, wondering if you could talk a bit more about 2020 development, maybe just some of your most updated thoughts on puts and takes relative to that 4% long-term target. I know you called out the uncertainty related to the coronavirus and presumably what goes on with Pizza Hut in the U.S., but any more thoughts at a high level on those two points and any other potential puts and takes around the globe that we should be thinking about? Thanks.

Thanks, Dennis. It is really remarkable what the team has been able to do with development. As we've pulled back from building equity stores and the franchisees have picked up the development responsibility, as I mentioned in my remarks, passing 2,000 net new units this year, over 1,000 in the fourth quarter. These are numbers I think we're all incredibly proud of. I think what you're seeing is it's fairly widespread, right? Taco Bell opened over 100 net new units internationally this year for the first time off of a base of roughly 450. That's pretty impressive growth and that's getting stronger and stronger. And the U.S. for Taco Bell was hitting new numbers. At KFC, very widespread. You're seeing development, I think it was 99 countries, but we're building new units last year. And numbers like over 800 gross new units in the fourth quarter alone. And then even Pizza Hut International, you know, about 450 new units internationally. So the vast majority of our business is healthy when it comes to development and growing, and we expect those trends to continue into 2020. As far as specific things that may offset that, as we've talked about, we know we have a lot of Pizza Hut U.S. assets that are below our standards and need to close. And that could, on a short-term basis, have a negative impact on the pace of development. But, you know, we still feel very good about this 4% commitment in the long term and being able to grow at that pace. And I can tell you our teams around the world are excited about development. And obviously we'll talk about how the burgers will when we get past the transaction closing. But that's another positive when it comes to development for young. Thank you. Next question, please.

Your next question is from the line of John Ivancott with JP Morgan. Please go ahead.

Hi. Thank you. The question is on third-party delivery and also just overall order aggregators. What you're learning in developed markets around the world, and at this point, seeing how these markets are evolving in developed markets, do you think these types of businesses continue to be an opportunity to drive YUM's various businesses and whether that opportunity also exists in the U.S. with obviously some context around some of Grubb's recent comments?

You know, obviously delivery is an area of growth in our industry. Just to put it in context, I saw some NPD data recently. .4% of restaurant occasions are delivery. So while it's a growing part of the business, probably the headlines would fly bigger than it really is. But it is growing and it is something that our business is benefiting from all around the world. We are forming partnerships with the right aggregators by market that make sense for YUM done on the terms that would make sense for somebody with our scale and our cloud in the marketplace. And you're seeing it obviously be a little bit of a tailwind for us. I think the other thing I would point out is, when it comes to digital, it's not all delivery. Actually, the data that we're seeing is the vast majority of digital orders are actually for carryout. So not to be left out, I think our teams are very focused on making sure that with the click and collect model, it's working for us as well, not just the delivery model. There are costs to delivery today, no matter how you cut it, that add significantly to the per eater cost. And particularly for our brands, which are very much known for value, that makes the delivery occasion not appeal to our entire customer base. So as we always do, we're always about the customer and giving them what they want, what they want. For those customers that want delivery, we're leaning in there. And for those that are more carryout focused or dine-in focused, we have a program for them too. Thank you. Next question,

please. Your next question is from the line of Sarah Senator with Bernstein. Please go ahead.

Hi, thank you. I have a question about China and then just a quick follow-up on pizza in the US. I understand there's a lack of visibility on the outlook in China, but we heard from your China licensee last night who's talking about 30% of the stores being closed and the rest comping down 45%. So maybe you can just help put some numbers around implications even if it's just, you know, if I estimate maybe a point of comp globally out of KFC and Pizza Hut is something like 7 cents of EPS to your full year EPS. If you could just help kind of quantify how we think about the implications of a point of comp decline or store closures, any kind of numbers. And then just a follow-up on Pizza Hut. You know, you mentioned, you referred to an acceleration agreement with Pizza Hut. I think the last one kind of closes out at the end last year and now a lot of the controls revert back to the franchisees. Are you seeing anything different about how they're approaching, you know, whether it's advertising or store closures? Is there any kind of, you know, strategic change now that that transformation agreement has concluded? Thanks.

So thanks. Good questions. Let me start with China. So on the China situation, I think, you know, most importantly, you know, this focus on the health and safety of customers and team members, you know, that's the top priority and we really appreciate how Joey and the Young China team and the authorities that they're working with there have that as their focus. So that remains our top priority. As you mentioned, you heard their call last night. For those of you who haven't seen it, I think it would be really helpful to go review their comments. We thought they did a very nice job summarizing the situation. One of the key elements, of course, is that it's a dynamic situation that is a bit, you know, hard to predict with a lot of precision right now. Maybe just to give you some numbers, you know, and you can kind of work through the math. One point of same store sales growth in China for a full year would translate to 19 basis points of same store sales growth for Young and it would also translate to 2.9 million dollars in Young operating profit for the year. So hopefully that gives you, you know, a metric that you can use as you work through your estimates. But again, the situation remains dynamic. We'll continue to stay connected with them. The other place that we're monitoring closely is impact outside of China. I can tell you that right now, obviously, as you know, the situation is most active in China outside. There really are no store closures that we have as of right now, but we are staying close with those teams and monitoring the impacts.

On the question about the PITET Acceleration Agreement, I know there was a comment about controls reverting back to franchisees, but the reality is what was in that Acceleration Agreement made permanent changes to the franchise agreement. So the marketing contribution increased, some of the operational standards that we now have, those all stay, commitment to loyalty and technology, all stay in the agreement. As far as franchisees go, obviously, you know, nobody's happy seeing the sales growth negative, and I think they're excited about Kevin joining, as I mentioned earlier, and I'm pleased to say that they're partnering with Kevin, and I think they're working constructively together as we continue this turnaround of the PITZHUD US business, which we mentioned repeatedly is something that we're not counting on a dramatic change in the business in the short term, but we're proud of the work we're doing to build a stronger business in the long

term.

Your next question is from the line of Brian Bittner with Oppenheimer. Please go ahead.

Thank you. Good morning. On the PITZHUD US business, can you give us an update on a broad range or ballpark range of unit closures that you do expect in 2020, and just a follow-up on the Habit Burger acquisition, you know, very small acquisition in the grand scheme of its impact to young brands and the medium-term, and I totally understand the opportunity to provide your franchisees, but can you just talk a little bit more about what caused you to possibly maybe pass on something that would be larger and more impactful to investors?

Yeah, so good questions. I'll take the first one. You know, I think on the PITZHUD US situation, as we mentioned, given the processes we'll work through with a handful of franchisees, you know, there will be, as we've said, choppiness in the situation as we go forward. You know, I know we had shared a number of 7,000. I wouldn't get too wrapped up on that number as from quarter to quarter, you know, the choppiness would be a little bit hard to predict, but we do think in the long term that there is opportunity for growth in the network, but in the near term it's going to continue to be choppy.

As far as the habit goes, we're obviously limited in what we can say at this point until the deal closes and we get shareholder approval, but what we have said publicly, which is what we're excited about, is this is a great risk reward. As you said, Brian, it's a small investment, but we're buying something that has a lot of growth potential. As you know, we're all about growth. We're not interested in buying big businesses that are of the same scale of ours that don't have a lot of growth. We want to buy something, we're looking for the upside that comes with that growth. We think given our scale and our capabilities, they match up with habit very well and we should be able to unlock growth, give our franchisees a great new growth vehicle in the US, and given our ability to take things to international markets, take this brand outside the US in a bigger way than they have already. We'll talk about this a lot more as we go forward, but I think the summary would be we really like the risk reward in terms of the size of what we have to pay to get something with the potential that it has.

Thanks, operator. We have time for one more question.

Your final question will come from the line of David Palmer with Evercore ISI. Please go ahead.

Thanks for squeezing me in. If we were to talk about 2020 in terms of your versus your algorithm, and excluding coronavirus, which is obviously a discrete health crisis this year, and the 53rd week, what sort of year were you thinking about versus that algorithm? And of course, in that is how important something like what you're going through with Pizza Hut US is to that. And then you touched, you said some comment about coronavirus Asia X China, I'm wondering, are you already seeing an impact in some way from in other parts of your Asia business? Thank you.

David, just taking the last part of that first. We weren't trying to imply that we're seeing any impact. We were actually trying to put people at ease that we haven't seen an impact and we haven't seen any store closed or anything of that sort. But obviously we're prudent to be looking at everything related to coronavirus and planning for all different eventualities. As far as the 2020 algorithm goes, I can tell you we entered 2020 with a plan to deliver on our long-term algorithm that we all felt good about despite all of the noise we might have from Pizza Hut US or anything else. I mean, when you have 2000 franchisees and 50,000 restaurants and you're in 287 brand country combinations, not all parts of the business are always coming all the time. And that's always taken into account as we enter a year. But we felt good about the plan going into the year. Obviously the coronavirus and the impact it has on China has a significant impact on us and our financial performance this year and ability to hit that algorithm. But other than that, I think we feel good about the business. We obviously have challenges within the Pizza Hut US business related to our large franchisee which we'll deal with, we'll get through and feel good and feel really great actually about the long-term health of the business. With that, I'll just close the call by saying 2019 was truly a milestone year for us. We've successfully delivered on all the commitments that we talked about in 2016 which we're looking past now as we go forward. But really, I'm incredibly proud of the team and what we've accomplished. We started out that journey in 2016 talking about the fact that we have a bold goal of getting to 7% system sales and I know a lot of people didn't believe that Young could do that but we just concluded a year where we delivered 8% system sales even if you back out TelePizza, it was 7%. So we hit that bold goal and we're incredibly proud of that. We opened over 2,000 restaurants last year representing 4% growth and cost the 50,000 unit mark that's sooner than we had anticipated back in 2016. So we're really coming out of this transformation much stronger than we were entering it and it's across all aspects of the business. We've really strengthened the team given all the people I've talked to you about on this call that we've added and folks that have been promoted. We've certainly improved the culture we're operating more collaboratively and to do that during all the turmoil of the transformation I think is a truly special accomplishment. I think our strategy is tighter than it's ever been with our four growth drivers our recipe for growth and our recipe for good and then we've got these extra areas of growth like the Habit Burger acquisition which I'm really looking forward to talking to you about Habit and Russ Bendel, their great leader and their team when we get on the next earnings call. So in summary, the business model is working we're a diverse world's largest restaurant operator with more units than anybody else and we couldn't be more excited about the future. And with that, I appreciate everybody's time today.

Thank you. Thank you again for joining today's conference call you may now turn it over to the next speaker and we will now disconnect.