Yum Brands Inc (YUM) — Q3 2017 Earnings Call Transcript

Thank you, Angela. Good morning, everyone, and thank you for joining us. On our call today are Greg Creed, our CEO; and David Gibbs, our President and CFO. 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 with 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 on 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. 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 would like to make you aware of the following changes in upcoming Yum! Investor Events. Disclosures pertaining to our outstanding debt in our Restricted Group capital structure will be provided at the time of the second quarter Form 10-Q filing. Fourth quarter earnings will be released on February 8, 2018 with the conference call on the same day as we plan to provide perspective on 2018 in conjunction with that call. Now I'd like to turn the call over to Mr. Greg Creed.

Thank you, Keith, and good morning, everyone. Yum! Brands delivered another strong quarter of results with 11% core operating profit growth and 22% EPS excluding special items. System sales grew 6% driven by 3% same-store sales growth and 3% net unit growth. We're reiterating our guidance of 207 and remain firmly on track with achieving our 2019 transformation goals. Today I want to first talk about our recent anniversary celebrations, then I will discuss two of our four key growth drivers, which influenced our daily decision-making including unrivaled culture and talent and distinctive, relevant, easy brands. And then David will follow up with both restaurant development and unmatched franchise operating capability. Now to begin our recent anniversary celebrations. Two days ago, we celebrated our anniversary since the spinoff of Yum China as an independent company, and David and I were fortunate to be in China last week to celebrate and talk about our future together. We're proud of Yum China's success and impressed by their ability to make Yum's brand distinctive, relevant, and easy. Our collaboration with Yum China is strong as ever and we’re confident in the power of our brands by working together. In connection with the spinoff, we announced our multiyear strategic transformational initiatives to become more focused, more franchise, and more efficient so we can deliver more growth to our shareholders. We're making significant strides towards completion of these initiatives and look forward to updating you today as we progress on this journey. Another reason the anniversary occurred last month when we celebrated our 20th anniversary as an independent company since the October 1997 spinoff from PepsiCo. Yum! Brands has more than doubled its system sales, growing operating profit more than six times over and developed into a global powerhouse, selling from 30% of restaurants outside the U.S. to nearly 60% of restaurants outside the U.S. A $10,000 investment in Yum! Brands in 1997 at the time of the spinoff from PepsiCo would be worth $170,000 today, a phenomenal return. A lot of change has occurred in 20 years and really even in the last year, but the one constant has been our unrivaled culture and talents. When David Novak began leading this company, he truly believed that culture mattered and it could be a distinct competitive advantage. And I'm proud to say our people-first culture has never been stronger and is a competitive advantage for Yum. As I traveled to some of the 137 countries where Yum is represented, I witness firsthand the caliber of our people around the world. I take a lot of pride in knowing that our people-first culture drives the passion for our brands that each of our employees and partners display as they are truly engaged in delivering their unique piece of Yum. As we celebrate these first and 28th anniversaries, I'm committed to ensuring that our unrivaled culture and talent remains an advantage for Yum today and in the future. Now to our three distinctive, relevant, and easy brands. First, KFC representing nearly 50% of the operating profit. During the quarter, system sales grew 7% with 4% same-store sales growth and 4% net unit growth. At our recent analyst day, we highlighted the brand's strong track record of success and the significant room for growth in both developed and emerging markets. We also highlighted delivery as a future driver of results, where we expect to double delivery sales to at least $2 billion by 2020. KFC's product is ideal for delivery and market share and enthusiasm for executing it. That’s why our KFC teams attended the delivery summit where Yum! China shared key learnings from their extensive delivery network including best practices to ensure this becomes a successful repeatable model for KFC around the globe. The need to ease is making delivery one of the largest growth drivers for KFC, and the team came home with several action items to not only accelerate the growth of the delivery business at KFC but to ensure the experience is best-in-class. As another example of best practice sharing, approximately 300 KFC individuals from around the world including franchisees came together to share ideas on value, delivery, and innovation at our annual marketing planning meeting this quarter. The teams came hungry to learn from their counterparts across the globe as they shared ideas on 12 food innovations and left the meeting confident that KFC has a very strong global pipeline of innovation rooted in insights and culture. Taking place for over a decade now, this is the original repeatable model. As I mentioned earlier, the entire global leadership team and I have been as weak in China where we all came away impressed with the China team's ability to make our brands distinctive, relevant, and easy. KFC China is executing on digital, social, and delivery. We even had KFC delivered to us on the train by placing our orders via mobile, with the team member delivering it to us at the next stop when we arrived. It really doesn’t get much easier than that. Yum! China has truly created an all-access brand. In vision to China, another market demonstrating their power, distinctive, relevant, and easy brands is Latin America, where our year-to-date same-store sales growth has grown 5%, and third quarter same-store sales growth is at 4%. Using our always original brand positioning, the team has grown the call with buckets and box meals as well as driven innovations through the launch of flavored chicken on the bone and our marriage of chicken and pizza into the Chikzaa. Thailand has turned around their business this quarter with 4% same-store sales growth by adding more value to the calendar and communicating in a way that really connects with consumers. As an example, the chicken and share for TBH99 or approximately $3 offers value in the snacking category and is positioned as TBH20 or $0.60 per person. KFC is truly a global powerhouse brand with China, Latin America, and Thailand being three examples of our markets demonstrating success with our always original brand positioning, value, and delivery. Next, Pizza Hut, currently representing 20% of Yum!'s annual operating profit split nearly even between the U.S. and international. During the quarter, Pizza Hut U.S. system sales declined 1% with flat same-store sales growth and 2% net unit decline. At our recent Analyst Day, we demonstrated the changes underway as a result of the transformation agreement signed in the U.S. at the beginning of May. Mainly a hot, fast, and reliable Pizza Hut experience. Most importantly, the transformation agreement represents clear alignment among the system for a digital, delivery-centric way forward. We are making our investment in hot in a 360-degree way. When you see our ads on TV, they highlight our commitment to delivering our Pizza 15 degrees hotter. When the pizza arrived at your house, it's wrapped in a new delivery container with three layers of thermal insulation. When you bite into the pizza, it will be crispier as a result of our new proprietary sheet included inside every box. Each of these changes are designed to deliver on our commitment to hot. These changes were rolled out to all Pizza Huts across the U.S. just after the end of the third quarter and will be part of your next Pizza Hut experience. To deliver on our fast and reliable commitment, Pizza Hut announced the addition of 14,000 new delivery drivers by the end of the year and has executed other operational enhancements designed to make the delivery system more efficient. Additionally, the Hut Rewards Loyalty Program was launched in August. We’re encouraged by initial trends and are confident our investment in loyalty will pay off in the long run. As we said before, we do not expect the transformation agreement to yield results overnight, but we do expect to see improvement over time. I'm confident that the changes made with the transformation agreement will allow us to execute on our commitment to a hot, fast, and reliable Pizza Hut experience over the long term. Internationally, Pizza Hut system sales grew 7% with same-store sales growth of 2% and net unit growth of 6%. At the analyst day, we highlighted the growth potential of this business through unit growth and repeatable models including technology ventures. India was a standout market for Pizza Hut with its fifth consecutive quarter of same-store sales growth. They have implemented the repeatable model for perfect pan pizza execution. The market also has renewed its focus on team member training, ensuring team members have the tools necessary to deliver an exceptional customer experience. As a result of these changes, customer satisfaction scores have improved over 9 percentage points versus the prior year. The team has now signed development agreements with our franchisees in India and I recently met with these franchisees and can feel there is enthusiasm for the brand. They are great examples of franchises to exhibit the three Cs: capable, capitalized, committed; committed both to our brand and to our culture. With the perfect pan pizza, team members are ready for action and the right partners in place. India is poised to accelerate its growth, and we look forward to seeing continued success in this market. Finally, Taco Bell, which represents approximately 30% of Yum!'s operating profit, by keeping to the core of Mexican-inspired products with value and innovation, Taco Bell delivered another solid quarter. This quarter, system sales grew 6% with same-store sales growth of 3% and a net unit growth of 3%. During the quarter, the busy potato readout combined the powers of crispy potato bites, seasoned baked, cheddar cheese, nacho cheese sauce, and a kick of creamy chipotle sauce all for just $1. This showcases Taco Bell's ability to deliver innovative products at an attractive value to the consumer. And the Double Chalupa, which included a double amount of seasoned beef, built on a familiar craveable product while still delivering strong value in a $5 box. Now proven they are more than just food as fuel, Taco Bell delivered on food as an experience by launching their own line of clothing and a partnership with Forever 21, including crop sweatshirts, shirts, bodysuits, and jackets. Taco Bell's first-ever retail collaboration is inspired by the iconic graphics that each brand is known for with a mix of vibrant prints. We understand the importance of reaching the consumer beyond food and giving their fans another reason to celebrate. Internationally, Taco Bell opened 15 new stores this quarter; Brazil continues to develop strong and has now opened 17 stores over the past 12 months. I've mentioned before we continue to unlock the business model by driving costs out of the supply chain and building scale with new and existing franchises. India is a great example of this, where we're now locally sourcing corn and equipment, which significantly improved their margin. India and Brazil are Taco Bell's four key growth markets along with China and Canada. We continue to be excited about the potential for this brand internationally, and changes to the supply chain such as those made in India will make the brand sustainable internationally over the long term. In summary, the focus on our four key growth drivers has delivered our strong third quarter results, building off a solid first half of the year. We remain confident in the underlying strength of our business and are confident in reiterating our 2017 guidance and transformation targets. And now, it gives me great pleasure to introduce our President and CFO, David Gibbs.

Thank you, Greg, and good morning, everyone. Today, I will discuss our third quarter results and full-year outlook as well as an update on our transformation initiative and how we are bringing two of our four key growth drivers to life: our bold restaurant development and unmatched franchise operating capability. Yum! delivered another successful quarter with 11% core operating profit growth and 22% EPS growth excluding Special Items. During the quarter, there was minimal impact to operating profit from the timing difference between refranchises and the associated G&A savings referred to as the net impact from refranchising dilution. Additionally, during the quarter, we spent approximately $10 million on incremental advertising at Pizza Hut as part of the transformation agreement. This was included in Pizza Hut operating profit. We are reiterating our 2017 full-year guidance of mid-single-digit core operating profit growth. As a reminder, this was derived from underlying based operating profit growth of high-single digits adjusted for the 53rd week and the net impact from refranchising dilution. We caution that the timing of the refranchising impact would be hard to predict. While we had limited net impact from refranchising dilution in the first quarters of the year, we expect this to be a significant headwind in the fourth quarter, which is consistent with the 10 to 12 percentage points headwinds discussed during our second quarter earnings call. In addition, we expect $15 million of incremental Pizza Hut media investment in the fourth quarter or an additional 3 percentage points of headwind. Now regarding our transformation initiative, we remain on track to deliver all aspects of our multiyear strategy of being more focused, more franchised, and more efficient to deliver more growth. First, more focus. This quarter was our second consecutive quarter of delivering 6% system sales growth, on our way to a bold goal of 7% system sales growth. Second, more franchise. This quarter we refranchised 209 units including 72 KFCs, 46 Pizza Huts, and 91 Taco Bells, increasing to 95% franchise ownership. We continue to expect the majority of the refranchising to be completed in 2017, with the remainder reaching at least 98% franchise and less than 1,000 company-owned restaurants to be complete by year-end 2018. Third, more efficient. We continue to make progress towards our G&A goal of 1.7% of system sales excluding special items. Year-to-date CapEx is $228 million. We now anticipate approximately $300 million to $350 million in CapEx this year, slightly lower just from our previous guidance of $350 million to $400 million. This will reduce in tandem with company ownership to approximately $100 million in ordinary cost of business CapEx by 2019. Year-to-date through the end of the third quarter, we repurchased over 19 million shares at an average price of $69. Our fully diluted share count as of quarter-end was approximately 349 million. Combined with our quarterly dividends, we have returned over $1.6 billion in 2017. We remain committed to returning between $6.5 billion and $7 billion to shareholders from 2017 to 2019. All of this is enabling us to deliver more growth, and we remain on track to deliver at least $3.75 in EPS in 2019. Moving now to bold restaurant developments, one of our four key growth drivers. During the quarter, we opened 641 new growth units and 362 net new units, achieving year-over-year net unit growth of 3%. Although we've not disclosed the breakdown of our long-term 7% system sales growth target between same-store sales growth and net growth, the key to achieving this over the long term is to ensure a strong development pipeline is in place with growth-minded franchises. We're attaching development agreements through our refranchising deals, which are a way for Yum! to accelerate unit development across all three brands. We're confident in the unit growth potential for each of our brands with continued growth at KFC and Pizza Hut in both developed and emerging markets and international development for Taco Bell really just beginning. The growth-minded franchisees behind our bold restaurant developments bring me to our fourth growth driver: unmatched franchise operating capability. We talk about the three Cs required for our franchisees: capable, capitalized, and committed. As an example of finding the right franchise partners demonstrating the three Cs, this quarter we consolidated our highly fragmented franchisee base for Pizza Hut in South Korea under one master franchisee. The consolidation of this market should allow us to streamline operations, enhance our growth prospects, and accelerate development in a key market for Pizza Hut. At KFC, we recently celebrated Founder’s Week, engaging all employees with Colonel Sanders and his passion for food. To honor the original celebrity chef, we celebrated the chef in each of our stores who hand-bread fresh chicken daily with recognition and by going back to basics on operations, recertifying our chefs on making our world-famous products to ensure our food is served with the irresistible taste we all know and love. At Taco Bell, Greg previously mentioned the supply chain initiatives in India positively impacting restaurant margins. It is operational enhancements such as these, which improve our unit level economics, strengthen our franchise partner's health, and have us enthusiastic about unlocking the potential of Taco Bell globally. In conclusion, we're pleased with our third quarter results, which build on a strong forecast and reinforce our confidence in the underlying strength of our business. Our strategic transformational initiatives and focus on four key growth drivers are setting us up to deliver more growth to our shareholders, and we look forward to updating you as we progress on this journey. And with that, the team and I are happy to take your questions.

Two questions: first, you talked about accelerating towards your refranchising goal a bit more rapidly from here, I think getting a lot done by the end of this year, and that contributes to some near-term earnings headwinds which you clearly alluded to for 4Q, and I know you're not giving '18 guidance yet, so would we be assuming our models that this refranchising dynamic also remains a diluted factor in the first half of '18 and then starts to reverse to accretion in the later part of '18 and into '19? Any color you can give us has 4Q will be helpful.

Yes Brian, I think that’s a good way to look at it. Obviously, we have a lot more refranchising to do and that will be more dilutive, and that’s why we highlighted the issues related to that in the fourth quarter and that will continue into the first half of the year.

Okay, and second question just on Pizza Hut U.S. Is there anything you can talk to regarding the early progress there? We heard a competitor yesterday putting a lot of points on inner felt for a weak start to the fourth quarter, so there is a lot of confusion swirling around regarding pizza in general, and I know it's really early in your turnaround efforts, but any light you can shed on how that's going?

I think to sort of answer two parts of the question. Look, we also love live sports whether it's baseball, college football, or NFL. We are not seeing any impact from any of that on our business and continue to obviously promote not just pizza but all of our brands on live sports. And then on Pizza Hut as I said, this is really us putting the foundations in place. The foundations are not always sexy, but I think delivering hot, reliable pizza is important, and I do believe the team is making progress in all the areas in the foundation that will enable us to build a stronger long-term Pizza Hut position.

And I don’t think that there have been any real impacts to our business from any of the issues, although I would point out that Pizza Hut is the official sponsor of the NCAA, and so we're happy about that partnership.

First, just on your system sales growth goals of 7% and two of your brands—one of them, KFC, you are very close—Taco Bell is obviously Pizza Hut lagging that 7%. So first, can you get to the 7% without Pizza Hut getting 7% itself? And when you think about Pizza Hut, can you get to 7% at Pizza Hut if that is a goal without the U.S. accelerating? Can you maybe just speak to the dynamics on the brands and maybe just dealing with Pizza Hut?

I believe you can see that we're making good progress. We're seeing strong advancements in KFC in developing and emerging markets, and our Pizza Hut international performance is also improving. Although system sales at Pizza Hut encountered a decline, we're not expecting any major breakthroughs, yet we are optimistic about enhancing our performance in the U.S. for Pizza Hut. Overall, I feel confident about the steady progress across all our brands becoming more distinctive and relevant, which we believe will help us achieve our long-term goals.

Yes, I think one of the ways to look at it is we have over 250 combinations of brands and countries, so some of those brands in some countries are going to be growing north of 10% and others will be growing less than 7%. Do we need Pizza Hut to get to 7% to get the entire system to 7%? No. As you've seen, KFC has been performing at 7%. And actually, KFC U.S. is closing more stores than they are opening right now; we know that's going to reverse. So, we've got upside at all three brands, and I know we are going to get there in different ways in different countries, but in aggregate, we've got our eyes focused on the price of 7%.

And if I can just follow-up, can you or maybe you did disclose some in the release, and I missed it; what the refranchising dilution is expected to be in the fourth quarter, just as there are a lot of moving pieces in that quarter. Can you isolate the refranchising piece so we can get a better sense of how we think about the first half of '18?

I think we've categorized that as 10 to 12 percentage points of headwinds through a combination of refranchising dilution and the impact from the 53rd week. You can do the math on it, but basically, we will get into more details on that in the fourth quarter, and the other challenge that we have with all of this refranchising is the timing is never really certain. These are deals that we're working on with outside parties, and they will close when they close. We don’t want to close them before they should close or any later than they should close. It was very hard to predict exactly what that will be in the fourth quarter.

Just wondered if you can talk a bit about the competitive environment in the U.S., I guess thinking mostly Taco Bell. Another good quarter there; you guys are holding up margins pretty well, and we're seeing a lot of these companies in the space having invested in margin and seeing some labor pressure. Just wanted to feel for if you think you can grow margins in Taco Bell from here or should we look for investments to try to keep the sales where they are.

It's definitely a competitive marketplace, I think we all know that, which I think is even more encouraging with the results we delivered. Taco Bell had a solid quarter, as you say, with plus 3% same-store sales growth. I think what Taco Bell is able to do is to balance being the value leader with an underlying economic model that delivers good industry-leading margins. I think that team knows exactly how to ensure that we continue to grow same-store sales while obviously protecting the sort of 20% plus margins. I've got confidence that through value and innovation, we will continue to do that in the fourth quarter and going forward.

You mentioned confidence against the 2019 earnings goals. I think there was some curiosity now ahead of 2019. It's more on those sustaining elements of the revenue growth which, of course, are the unit growth and delivery. Is there anything at this point— I know it's early; I know you probably have future analyst days ahead you want to talk about this more—but updates about particularly the U.S. when it comes to delivery and international when it comes to unit growth and the confidence you have in traction and any numbers or that will be helpful? Thank you.

On the unit front, I want to highlight that this quarter, we're nearly 100 units ahead of our net new unit development pace compared to last year, which is a promising indicator. In terms of gross units, we're more than 200 units ahead of our previous pace. We believe that as we meet our plans and the unit development begins to ramp up steadily, we have significant potential, especially internationally. In the U.S., there's a major opportunity for unit growth as both Pizza Hut U.S. and [AST] U.S. are trending towards net growth rather than decline, which is progressing well.

I think that question on delivery, which is sort of the easy part of distinct, relevant and easy, I mean the good news is we've got a thousand Taco Bells delivering. Now obviously, the KFC team, as we said, went off to the delivery summit with China, so they picked up a lot of ideas on how to execute delivery. We go almost, I think, 20,000 brands with Yum! currently delivering. We’ve got a lot of in-house knowledge obviously with the pizza brand and obviously with KFC and places like the Middle East delivery. And obviously, we're doing some testing work with aggregators. So, I think we're doing all the things that you would expect us to do in order to unleash the growth potential of delivery going forward.

Maybe following up, can you talk about how you think delivery played out in the U.S. in terms of getting the check size up and maybe how you think the bundled value meals fit into that kind of longer term to drive check size?

Sure. I think the good news is the delivery that we are doing—there are two things that are obviously, check does grow. Secondly, a lot of it is new occasions. So, I think what we are excited about delivery actually gives us greater access to newer occasions and high checks. Both of those will obviously help to drive system sales. I think right now it's early days, but what we are seeing is part of the check growth and a new occasion opportunity both of those obviously positive for our growth potential.

And maybe one follow-up just on the international business. It feels like across a bunch of different brands you've seen better numbers for the last couple of quarters from some of the international divisions. Any thoughts on the international consumer and particularly out of Europe?

When you are in that 137 countries, there is a lot of international consumers. Look, I think our business in Central and Eastern Europe is strong, our KFC business in the UK is strong. Look, I think where we built distinct, relevant, and easy brands, which is really the cornerstone of driving our system sales growth and where we've got great franchise partners who are executing great customer experience, I think that's why we are continuing to see the success and the growth that we are experiencing around the world. So, look, there will always be markets with good macros and bad macros; our job is to build distinct, relevant, and easy brands supported by unmatched franchise operating capability.

I think we've talked about this on past occasions, but a couple of years ago we made a change to organize globally around brands, and that change principally benefitted the international sector because we've already been organized that way in the U.S. So, I think part of this success we are seeing in building distinctive, relevant brands is really what we keep talking about: just more focused on the brands and sales dedicated 100% teams to the brands internationally working even closer with our franchise partners.

The question is on KFC. Obviously a good quarter both from same-store sales and a unit development perspective. But you are considering that your biggest division and it's kind of still the drivers of the overall Yum! engine. I just wanted to get a sense of what can accelerate from here at KFC in order to allow the corporation to achieve its 7% system-wide sales growth. 4% global comps I think it's in the above-average number for the division, and obviously, something that you'd be proud of at any point. Accelerating unit development beyond the 4% level that you are currently achieving on a unit base of 21,000 is obviously just a tough order just by the law of large numbers. So, I just want to get your sense of what can accelerate from here at KFC, or is this just a type of division that, even if you are achieving 7% system-wide sales growth as we think about in the next 3 to 5 years, would just in and of itself be a great level?

Well, I think the good news is—I've talked about same-store sales growth. I think the good thing is that Roger Eaton is doing a great job of getting everyone focused back on the call. So if you think about the innovation that we've been doing, it's all been innovation around core chicken on the bone. So, flavors delivered by chicken on the bone, value— you have got everyone running $5 boxes, $10 share, and $20 family meals. I think that’s helping delivering. Obviously, we do believe that the KFC brand, I joke internally, that the Colonel we're going to deliver, and that’s why he made the bucket 60 years ago. Because there is no better delivery vehicle than a bucket of chicken. So, I think that for all those reasons: focus on the core, flavors around the core, pride in the core, and then obviously great execution plus then delivery—I think will give us confidence that even though this is a big brand and yes it has a lot of big number, this brand can continue to deliver like it's been delivering for the past few quarters, and I remain firmly confident that this brand will continue to deliver.

So that 4% type of comp level is something you think that this execution, delivery—sounds like it's an achievable number over the long term. What about on the restaurant side? I mean, does it make sense? Would you want the 21,000-unit brand to accelerate beyond 4% system-wide unit growth year-on-year?

Obviously, we talked about it's not providing brand by brand guidance on development, but your question is well placed, John. Of course we like to see all of our brands pick up the pace of development. KFC is building a lot of units, but it also describes the service in so many markets in the world. I know the KFC team is continually looking for ways to accelerate development, and you’re seeing some of that happening this year.

And something that a lot of companies kind of experience, both in a good way and a bad way, is that 1000 or 2000 units globally in a year can be too much. There are two things: one is franchise capability and demand, and secondly, at the level that you think is right for the brand to grow in terms of units. I'm just trying to get a sense of what that maximum limit is or perhaps if there is a way that as there is market-to-market build-up, it continues to make sense to accelerate that development.

I think two things. John, I think, as David said, in a large part of the world, we have less than one unit for every million population. In a large part of the world, you would argue we would be under-penetrated compared to sort of developed market economics. The second thing is, I think as we’ve gone through this transformation, as we refranchise the business, we build in, as we've said, stronger franchises. So about our existing franchise base, we’re very happy with and the new franchises with development agreement attached to all of this, which traditionally we haven't done. But as well as with the capability and the commitment to actually do this development. So, I think for those reasons, we feel good about the KFC branding out to deliver both same-store sales growth and net new unit growth this year, next year, and the year after that.

I guess I have a follow-up on that unit development question—it's very obviously encouraging to see that pick up in the unit growth. But as you look at the present unit growth that you had over the past, through this quarter or past quarter, do you know how much of that is normal development growth pipeline versus the contractual commitments you're receiving from refranchising or the contractual commitments that you get from when a franchisee turns over? I'm curious if the uptake that we're seeing now could accelerate because we're not actually getting those refranchising type commitments in the numbers yet.

I think it's fair to say that some of the refranchising commitments have started to impact the pace of development. But remember, with the time frames around development, and we just really restarted this batch of refranchising a little bit over a year ago, a lot of these deals were in the pipeline before the refranchising began. So it's starting to have an impact, and we hope that it will continue to have an impact of even greater magnitude as we go forward.

And on a G&A decline by $300 million as it relates to the refranchising you’ve said that extensive would be done with that refranchising by year-end. What causes a lag between refranchising and G&A reductions as your asset-based trends? I mean, do you have the due to store related G&A? I mean, you have the headquarters G&A. I'm kind of curious how the perhaps the headquarters G&A would lag or lead that refranchising that would drop those G&A dollars?

I guess also to clarify, we've said the majority of the refranchising would be done by year-end, but we certainly will have some refranchising that will still be in 2018. And then as far as what might be a lagging item on the G&A versus the refranchising of stores, just to give you an obvious one: in some international markets, if we're selling the entire market, we might have office lease obligations, we might have to do a lot of things with employees to continue during the transition period to a franchise ownership organization. All of that would be lagging the actual transfer to restaurant-level profitability that we would be going to with the franchises.

Can you provide any more detail on what you are seeing from those refranchise initiatives in place at Pizza Hut in the U.S. at this early stage? Anything on loyalty, the new thermal packs, the new app, or the marketing spend? Maybe if it's just customer satisfaction metrics, maybe what the franchises are seeing—any of the incremental detail would be great? Thanks.

I believe this is a strong positive development. The good news is that when QSR magazine rated us in the genius category, we were only second to Starbucks, alongside Domino's. We feel very good that our brand is being recognized within the industry. We are making progress, and while it's still early, the advertising for our hot pouches has just started. As mentioned, you will soon enjoy a crispier and hotter pizza experience at your next Pizza Hut. We are focusing on the essential foundational elements, and I am pleased with the progress we are making on all these fronts.

If I can get more in with the roughly 600 restaurants refranchised year-to-date till the end of the quarter, anything more you can say about those transactions? I guess and just specifically any commentary on the development agreements coming out of those? I'm sure there is only so much you can say, but as far as number of years, just to think about anywhere that is kind of contracted?

Yes, I think first of all we are pleased with the prices we are getting for refranchising. As I've mentioned on previous calls, there's a strong market for the stores that we are refranchising and a lot of capital out there available for these kinds of deals. And similarly, with that capital availability, we've got franchises willing to sign up for development commitments. We've got generally very good unit-level economics in most of the countries we operate in, so yes, I think it's been a very positive story in terms of the reception to the refranchising program.

Greg, with the quick service industry increasing focus more recently on the $1 to $3 price points, it seems likely to intensify early next year. Looking to talk about differentiating on value, given the brand with the only national QSR with a $1 menu over the last five years. And then I have a follow-up.

I think as I said earlier, the great thing is we can grow $1 all day, all night, all week, all month, all quarter, and still have great margins. We've got a really good underlying economic model at Taco Bell. We will never give up that leadership of value in the QSR category, I can assure you that. I know Brian and the team are very focused on what's going on in the marketplace, but I think we're very confident, we execute our plans, given the context of what's occurring, that we can still be very competitive in that price range.

Thanks, and then David, what led to minimal profit dilution from refranchising in 3Q while you guys were ahead of schedule in the franchising activity? Further, what expense should we expect the franchising dilution to be most evident in 4Q and early 2018?

The minimal profit dilution in the first part of the year, obviously some of this depends on what kind of stores you're selling; if you're selling stores with lower margins and you're collecting royalty in some cases, you can see a positive impact from the refranchising. In terms of where these things are going to show up in our P&L, obviously you will see our margins going down brand by brand; you will see G&A going down, and then franchise and license expense going up, particularly when we refranchise stores that we end up holding on to real estate or remaining on lease obligations. We have to recognize the brands and depreciation to the franchise and license expense line.

I have a quick follow up on pizza, and then I wanted to ask about Latin America. The first on pizza, I was just—I know you, if I didn’t see any real impact from NFL viewership, but it does seem like the category aggregate has slowed. So, Greg has mentioned the idea of delivery being part of easy, and I'm wondering if the fact that so many other restaurants are pursuing this kind of easy component through delivery is that having any impact? And then, like I said, I have a second question about Latin America, please.

I think a lot of people are trying to get into the easy delivery business, but I think we've got a track record of doing it for so many years. We obviously have a system that knows how to deliver. I think what we’ve done is we doubled down; we hired 14,000 more drivers as we said to deliver. We have the team operationally focused on making sure that we improve the speed of service, we make the pizzas hot—you can now track it. You got a loyalty program. So even though I think competition is heating up in this area, I also think we're raising our performance, and I think that will continue to keep us competitive in this marketplace.

Okay, thank you. And then just on the Latin America business, you talked about it very positively, and I think from the time that I’ve been following you and it’s been going to be in the shadow of emerging Asia in particular. Are you seeing sort of a quantitative or qualitative difference in performance there, and does that change potentially how you think about the balance of your global growth going forward?

As we think we said, what I love is we've got this content of repeatable model, and it's very clear that when we execute all best practices to the repeatable model, it has an impact. So the Latin America KFC performance I spoke about was really about implementing the repeatable model, maybe so we had value and then innovation around chicken flavored chicken on the bone. We’ve also got, as we talked about, the talk about our Brazilian business now has opened 17 restaurants in 12 months. So that was a market that we were in for that brand in the past. So, look, I think we just feel confident that by executing the repeatable model and growing our presence with a brand like Taco Bell, we can get more growth out of Latin America. Okay. So, I'd like to thank everyone for being on the call today. I think we delivered another strong quarter, we are firmly on track to achieve our 2019 transformation goals. I do believe we are focused on the right key growth drivers, and now it’s all about execute, execute, execute. So, thank you for being with us. Thank you for supporting us, and we look forward to speaking with you in the future. Thank you. Bye-bye.