Yum Brands Inc (YUM) — Q4 2017 Earnings Call Transcript

Thank you, Ken. 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 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 on today's call. First, System sales results exclude the impact of foreign currency, include the impact of lapping the 53rd week unless otherwise noted. Second, Core operating profit growth figures exclude the impact of foreign currency and Special Items but include the impact of lapping the 53rd week unless otherwise noted. 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 this live conference in any future news of the recorded. We'd like to need you aware of the following upcoming Yum! Investor events: First quarter 2018 earnings will be released in May 2018, with the conference call on the same day. The remainder of our 2018 key earnings dates are available on our website. David Gibbs will be presenting on March 8 at the JPMorgan Gaming Lodging and Restaurant Management Access Forum in Las Vegas, Nevada. Roger Eaton, KFC CEO will be presenting on March 14 at the Bank of America 2018 Consumer & Retail Technology Conference in New York City. Lastly, disclosures pertaining to our outstanding debt in our Restricted Group capital structure will be provided at the time of the fourth quarter Form 10-K filing. Now I'd like to turn the call over to Mr. Greg Creed.

Thank you, Keith, good morning everyone. The fourth quarter marked a strong conclusion to the first complete year of our transformation journey. For the full year, Yum! achieved 5% system sales growth, excluding the impact of the 53rd week. This growth included 2% same store sales growth and 3% net new unit growth. We reached an important milestone in 2017 by ending the year with over 45,000 global restaurants across 139 countries and territories. We are optimistic about the long-term growth potential of Yum! brands and are progressing well with our strategic transformation initiatives. Today, I will discuss two of our four growth capabilities: distinctive, relevant, and easy brands, and unrivaled culture and talent. After my remarks, David will cover the second two along with our restaurant development and unmatched franchise operating capability, and he will also review our 2017 results, 2018 guidance, and progress towards our transformation initiatives. I’ll start with our distinctive, relevant, and easy brands. A key way to enhance a brand's accessibility is by offering delivery right to the customer's door. I am thrilled to announce a new partnership in the U.S. with Grubhub, the leading online and mobile food ordering service, which provides delivery in over 1300 U.S. cities. This partnership will significantly increase KFC and Taco Bell's capacity to offer online ordering for pickup and delivery in all current U.S. Grubhub markets, with many more to follow. Making it easy for customers to access our brands is essential, and this partnership with Grubhub is vital for achieving our goals of being distinctive, relevant, and easy. Now, regarding our brands, starting with KFC, where system sales increased by 6% excluding the 53rd week, with 3% same store sales growth and 4% net new unit growth in the fourth quarter. We had notable international markets, particularly Russia and Brazil. In Russia, system sales surged by 26% in the quarter, with 9% same store sales growth and 18% net new unit growth. This robust growth has been supported by a marketing emphasis on value and core offerings. In 2017, Russia marked its fourth consecutive year of opening at least 1000 new stores, driven by technology-based development strategies and controlled growth through development agreements. In Brazil, same store sales rose by 21% for the quarter and 18% for the year, bolstered by extensive media coverage and strong operational focus. Brazil also prioritized cost reduction and improved supply chain distribution to ensure value products are financially viable. In the U.S., we faced increased competition in chicken innovation and value during the fourth quarter, resulting in a 1% decline in same store sales, though we still wrapped up the year with four consecutive years of same store sales and traffic growth. While we were disappointed in this quarter's results, we are optimistic about 2018, spurred on by marketing trends focused on value and innovation. We began the year featuring our valued Colonel and introduced our first female Colonel to highlight innovation with our new smoking mountain barbeque flavor. This follows familiar flavors like National Hot and Georgia Gold, providing a compelling way to add new flavors to existing products. We continue to remodel our asset base, planning to upgrade another 600 stores in 2018, which should see nearly 40% of our assets reflecting the current image by year-end. We are looking forward to 2018 and believe it will be our fifth consecutive year of positive same store sales growth. Next, at Pizza Hut, same store sales climbed 2% in the U.S. during the fourth quarter, showcasing the strength of our Longlines systems under our transformation agreement and creating positive momentum in the business. Pizza Hut is committed to giving every customer a hot, fast, and reliable experience. The hot experience starts with 145,000 new thermal pouches, ensuring your pizza arrives 15 degrees hotter. Our fast strategy has involved hiring 14,000 new delivery drivers in 2017 to improve delivery times, as we aim to be the employer of choice for delivery drivers. In addition, over 24,000 new car toppers are now in use. The reliability of our service has been enhanced by key digital features launched in the fourth quarter that improve the user experience on both mobile and online platforms. We are encouraged by the initial outcomes of the hot rewards royalty program launched in August and trust that our commitment to loyalty will yield benefits over time. Another exciting development includes our partnership with Toyota to introduce driverless vehicles for Pizza Hut deliveries, reflecting a spirit of innovation at both brands. We are enthusiastic about Pizza Hut's future in the U.S. and confident that our investments in a hot, fast, and reliable customer experience will drive positive results. On the international front, we are pleased with the 6% net new unit growth in 2017, opening nearly 500 new restaurants, with strong expansion in Asia, including Indonesia and India. The fast-casual pizza segment is rapidly growing, and we are aligning our delivery-centric asset strategy to capitalize on this trend. Our repeatable value model continues to perform well in several international markets, including Korea, China, and the Philippines, as we make significant strides in enhancing digital and technology efforts to improve access to our pizzas globally. Lastly, at Taco Bell, system sales increased by 3% excluding the 53rd week, with 2% same store sales growth and 4% net new unit growth for the quarter. Taco Bell’s ability to innovate and elevate sets it apart. We unveiled our $1 value menu to celebrate abundant indulgence, along with the Blueminatti ad campaign that positions Taco Bell as an exclusive society where anyone with a dollar can explore 20 satisfying and innovative offerings. To create buzz for our new products, we launched a movie trailer Web of Fries to introduce our new nacho offerings added to the $1 menu, which come with a side of warm nacho cheese—an embodiment of Taco Bell's ethos of celebrating value. To further our commitment to accessibility, Taco Bell recently announced all access initiatives focused on digital design, including installing self-service kiosks in all restaurants by the end of 2019, enhancing our delivery strategies and introducing order-ahead options for both in-store and curbside pickups. We acknowledge the importance of technology and see the immense potential in making Taco Bell easier to order. Our development efforts are thriving, with 2017 being a record year for both domestic and international restaurant openings. Internationally, we launched in five new countries and achieved a notable milestone with 400 Taco Bell restaurants overseas. We have been successful in various markets; Canada reported solid same store sales growth of 11% in 2017, marking four consecutive years of significant growth. In India, we introduced the innovative naked chicken taco, while in Brazil, we opened 20 units in just 15 months. We have also signed development agreements in both Brazil and Spain to establish over 200 restaurants in each country over the next decade. The international growth for Taco Bell is just beginning and holds vast potential for the future. Now, moving on to our unrivaled culture and talent. I'd like to highlight recent talent acquisitions aimed at promoting distinctive, relevant, and easy brands. Julie is joining us as Taco Bell's U.S. President, tasked with steering innovation, new store development, and a frictionless customer experience through digital and technology initiatives. Our new Chief Marketing Officer for KFC U.S. will lead innovative marketing strategies and digital initiatives, while our new Chief Brand Officer will focus on cultivating the brand for today’s consumers, overseeing marketing and food innovation teams. We are able to attract such exceptional talent and many others because of our globally recognized brands, growth agenda, and exemplary culture. I truly believe our culture is a competitive edge, and we are thrilled to welcome these leaders to Yum!, confident they will deliver results across our organization. In summary, the fourth quarter was a robust finish to the year and a crucial step forward in reaching our transformation goals. Our focus on four key growth capacities has been a strong driver of our successful results. It is now my pleasure to introduce our President and Chief Financial Officer, David Gibbs.

Thank you, Greg and good morning everyone. Today I will discuss our 2017 results, 2018 guidance, progress towards our transformation initiatives, and two of our forward growth capabilities: bold restaurant development and unmatched franchise operating capability. First our 2017 results. I am especially pleased to report, we met or exceeded each component of our guidance. We delivered full year core operating profit growth of 7% despite headwinds from refranchising dilution, lapping a 53rd week, and incremental media spend associated with Pizza Hut transformation agreement. Same store sales growth of 2% and net new unit growth of 3% delivered system sales growth of 5% excluding the 53rd week, all within guidance. Before I talk about 2018, I do want to discuss our effective tax rate excluding special items for the fourth quarter and full year. Both rates were lower than anticipated due to the timing of planned repatriation of earnings and the impact of tax reform. The majority of our expected repatriation was backend loaded for the year, largely reflecting the timing of international refranchising transactions. Given that most of our foreign entities have November 30th year-end for U.S. tax purposes, any earnings repatriated subsequent to this date will require to be tagged as part of the one-time toll charge included in U.S. tax reform. Our ex-special rates for the fourth quarter and full year were lower than anticipated because they did not include tax on those earnings repatriated after November 30th. Instead, that tax was included in the toll charge that is part of our one-time special items charge for U.S. tax reform of $434 million that we recorded in the fourth quarter. Now looking at 2018, we do not expect any change to the underlying base operating profit growth of high single digits. However, there are several items which will affect our core operating profit growth in 2018. First, and similar to 2017, we expect operating profit dilution as a result of the timing difference between refranchising restaurants and the associated G&A savings which is consistent with our transformation plans. This is expected to negatively impact operating profit by approximately six to seven percentage points. Second, the revenue recognition accounting change which is required to be implemented beginning January 1st 2018. It's important to note that this does not reflect any change in our business model, the strength of our brands or our cash flows. It is solely a GAAP required change adjusting the timing of recognition of upfront fees received from franchisees and incentive payments made to franchisees. The most significant driver of the change is requiring upfront fees received from franchisees to be amortized over the life of the franchise agreement. Previously upfront fees will recognize in full when received. As a result, and because this is a prospective application, we expect approximately two to three percentage points of negative impact to our operating profit. All in, we are forecasting 2018 core operating profits to be about flat. Again, I want to reiterate we continue to expect underlying base operating profit growth to be strong, up high single digits. However, 2018 will be affected by these one-time items I discussed. Next, we expect same store sales growth of 2% to 3% and net new unit growth of 3% to 4% for the system sales growth of 5% to 6% in constant currency. This builds upon our system sales growth of 4% during 2016, 5% in 2017 and is a step towards achieving our long-term bold goal of 7%. We anticipate CapEx will be between $200 million and $250 million. Note this is a step down from our 2017 CapEx of $318 million and is tracking towards our run rate CapEx of $100 million beginning in 2019. All details of our 2018 guidance can be found on the investor section of our website. Finally, as a result of tax reform, we anticipate an ongoing effective tax rate of approximately 20% to 22% compared to our historical rate of mid to upper 20s. While we are able to take advantage of the lower U.S. tax rate, our benefit is somewhat muted by the cap on interest deductibility. The move to a territorial tax system is positive for us given the high percentage of our taxable income that is earned outside the U.S. but this is largely offset by the impacts of a new tax on global intangible low-tax income. Please note that we expect our 2018 tax rate to be slightly below the anticipated range I just provided. This is due to delayed applicability of the new tax on global intangible low-tax income as well as a higher amount of interest deductibility in 2018 primarily given refranchising gains which will drive higher U.S. pretax earnings. Turning now to our transformation initiatives designed to make Yum! brands more focused, more franchised, and more efficient to deliver more growth to our shareholders. First, the focus on our four key growth capabilities has helped us accelerate net new unit growth and drive sustained positive same store sales growth. This focus is a big reason why we have increased confidence in achieving our long term bold goal of 7% system sales growth. Second, on our journey to becoming more franchised, we sold 896 equity units during the fourth quarter for pretax proceeds of over $1 billion, ending the year at 97% franchise. We remain confident in our ability to reach at least 98% franchise by the end of 2018 and exceed $2 billion in after-tax proceeds from our refranchising efforts. Third, as a more efficient company, we ended the year with G&A excluding special items representing 2% of system sales, on our way to our goal of 1.7%. As previously mentioned, we continue to expect run-rate CapEx beginning in 2019 of $100 million. Each of these initiatives is designed to deliver more growth to our shareholders. During 2017, we've repurchased 26.6 million shares for $1.9 billion at an average price of $72. Additionally, we paid $460 million in dividends for a total capital return of $2.3 billion in 2017. Further, we were pleased to announce a 20% increase to our quarterly dividend for 2018, increasing from $0.30 a share to $0.36 a share. We value returning capital to our shareholders and remain committed to returning between $6.5 billion and $7 billion from 2017 to 2019 through both share repurchases and dividends. After evaluating the impacts of tax reform, revenue recognition, and our strategic partnership with Grubhub, we continue to expect that we will deliver at least $3.75 in EPS in 2019. Now, before moving on to our growth drivers, I want to provide you with some details of the investments with Grubhub. Yum! is acquiring $200 million in primary common stock, an investment expected to provide Grubhub with additional liquidity to, in part, accelerate the expansion of its industry-leading U.S. delivery network, drive more orders to Yum! restaurants, and further enhance the ordering and fulfillment experience for diners, restaurants, and drivers. We are excited about this unique partnership which includes having a seat on the Grubhub board of directors and aligns with Yum! long-term strategies to make our three brands easier for customers to access. Next to our growth drivers. We've talked about our four key growth capabilities fueling our decisions and results, and Greg talked to you about two of them. Now I want to provide you with an update on the remaining two: bold restaurant development and unmatched franchise operating capability. First, bold restaurant development, during 2017 we opened over 2600 growth units. If you think about it, this means across the globe we opened over seven Yum! Brands restaurants every single day with one new restaurant approximately every three hours. On a net unit basis during 2017, we opened over 1400 restaurants. This is more than 200 additional net new units than last year and nearly 2600 total net new units over the last two years combined. We are very proud of the teams and franchisees that made this happen and are committed to continuing this growth. Next, to unmatched franchise operating capability. At KFC U.S., the team utilizes a voice of the customer program to measure operational results and better understand guest needs and feedback. The metrics are standardized among participating competitors, and since launch in 2014, KFC U.S. has moved from near the bottom to above average on key metrics including overall satisfaction, taste, perception of speed, friendliness, and value. With each of these metrics improving at least 10 percentage points. The significant improvement can be attributed to the integrated back of house pack lines from the 2015 acceleration agreement with franchisees focusing on value with the $5 fill up, $10 chicken share, and $20 fill up and technology improvements to aid operations in labor deployment. Regarding our metrics at Taco Bell, both customer satisfaction and speed scores improved during our highest growing day part after 5 PM with customer satisfaction scores achieving a record high and up two percentage points over the prior year. Pizza Hut international continues to leverage technology to deliver a superior customer experience and is testing GPS tracking of delivery drivers to enhance the customer experience. In markets with GPS tracking, customer satisfaction scores are over 10 percentage points higher. We understand the importance of an exceptional experience at our restaurants and are pleased with these operational improvements. To summarize, 2017 was the first full year of our transformation journey, and we are pleased with the progress made towards our goal while also achieving each component of our guidance for the year. We remain confident in our future and look forward to updating you throughout 2018 as we become a more focused, more franchised, and efficient company delivering more growth to our shareholders. Now the team and I are happy to take your questions.

Hi thanks this is Eric on for Dave Palmer. Just wanted to touch on development for a second. I think you mentioned 3 or 4% unit growth is your expectation this year which is an increase from I think 3% in 2017. Do you feel like you have the building blocks in place to accelerate development across your three brands? Maybe if you could touch on any commitments that you’re excited about and then as a follow-up to that, how much is the development commitments from refranchising contribute to unit growth this quarter? And how much you expect it to contribute in 2018? Thanks.

Yes, well obviously we’re excited about the progress we’re making on development as I mentioned the 2600 growth new units is really a record for the last decade or so and in the quarter itself we opened up a net of 732 units compared to the 661 we opened last quarter of 2016. So that’s a quarterly increase of 71 units. So you can see we're making progress on the full year numbers, the quarterly numbers. There is momentum behind development. As far as how the refranchising plays into this, we've talked repeatedly about the fact that we're getting development commitments in the refranchising deals, but up until this last quarter, we hadn’t done the majority of our franchising with close to 900 units being refranchised in the fourth quarter. Those all came along with a lot of significant development commitment. So we're starting to see the benefits of the development commitments creeping into the numbers that we're reporting, but I still think there is a lot more to come from those development commitments. And because we're typically made over a multiyear period, so we think this sets us up with momentum on the development front for several years to come.

Hi thank you very much. I have a couple of questions I think to relatively small on the Grubhub partnership if I may. And I'll just come in to only one Q3 if you can address small one. Firstly, what percentage of KFC or Taco Bell would currently have Grubhub delivery coverage, in other words how much of the systems could be covered as GrubHub stands today? Secondly, do you have a plan for point of sale implementation with the Grubhub platform and the point of sales at KFC and Taco Bell? And then the third point, are these starts on the board that certainly very interesting for a lot of different reasons to be on Grubhub. Do you think that there might be a longer-term opportunity to either outsource or perhaps augment your current in-house delivery to a more outsourced model with Grub? So, if you don't mind just those three points on the Grubhub partnership.

Let me take the first couple. As you know, in the U.S. we've got a couple of discounts with KFC. So right now, I think by the end of the year, Grubhub will cover probably about 80% of all of the restaurants that could deliver. From a KFC perspective, we're not delivering at the moment, we're just in a couple of test markets with KFC delivery. So, we have a lot of work obviously as we believe those test markets will expand, and we will start delivering. I think we've said in the past that we've got close to 1500 Taco Bells already delivering, but this will expand obviously the capability for Taco Bell. So what we're excited about is both KFC and Taco Bell is really an opportunity to expand the presence that we've got in the number of stores that we can obviously bring closer to our customer. On the POS system, we are obviously aligning the systems, that work is ongoing. It will be critical as a part of making it seamless for our customer whether they order off our apps, website, or the Grubhub apps and website; all that work is ongoing. And I think the last question was just about the board and what the possibilities are for the Pizza Hut brand as a result of that. I think that's one where the ongoing conversations about how both Grubhub and Pizza Hut can leverage as a partnership if there are ways to do so. But right now, this is mostly about the Taco Bell and KFC relationship with Grubhub. I would also point out that this isn't just about delivery; it's about the ability to order online through Grubhub and pickup products at our restaurants. Grubhub and Taco Bell and KFC are working diligently to integrate the POS, as you mentioned, to make the ordering process very quick to get the orders into the restaurants and to the consumers. We have certain coverage ratios and targets in our agreements that when we hit them, we will really unleash the power of the partnership.

And is there a timeline for that technological integration, if you will? I think it's just been more difficult for a lot of brands over the past couple of years. I mean do you have a sense that you have an edge on that?

Yeah, certainly that’s a big part of this agreement is having an integrated POS system and yes, there are all sorts of internal timelines and schedules to get all of this work done. I think we’ll reveal details as we go on the journey with Grubhub, but for today, this is all about the announcement and the intention of having this be a really unique partnership with the board seat investment and what we think is a great partner for us on the technology front.

Thanks, good morning. I have two questions and like John, I’m just going to ask both of them at the same time and then listen to your answers. First, you know you talked about refranchising dilution being in 6 to 7% headwind to operating profits in ’18 and you would said at the beginning of this process that refranchising net of G&A reductions will be neutral in totality. So, is this still your thinking and does that mean that 2019 naturally is a year where all this dilution reverses to accretion? That’s just the first question. The second question is just a simple one, on the comp guidance for 2018 how does Taco Bell fit into that comp guidance for overall Yum! just given we see it as difficult comparisons and it's operating in a pretty intense US environment. Thanks guys.

Regarding the refranchising question, there are various factors that influence how it affects our profit and loss. For instance, we have focused on selling Pizza Hut locations, which generally have lower sales volumes and less dilution, resulting in a higher proportion of general and administrative expenses. Now, we have larger volume stores to sell for Taco Bell and KFC to complete the refranchising process in 2018. I can confirm that this remains a net neutral exercise between general and administrative costs and refranchising. We have done the calculations, and everything balances out, but we've probably seen slightly more benefits from the organic reductions in general and administrative costs up to this point. In the fourth quarter, we sold 900 stores, which will certainly impact our operating profit in 2018. Considering all these factors, it is still a net neutral exercise when factoring in refranchising dilution and general and administrative savings. As you mentioned, we expect to begin seeing more benefits in 2019 as opposed to the challenges we face in 2018. Regarding the comp guidance, while we provided global comp guidance, we won't break it down by brand, but we want to ensure that Taco Bell's sales are included.

Yes, I would just say that I think Taco Bell has been competitive in the market, and as we saw with the Blueminatti $1, which we just started the year with. As you’ve all seen, we have launched nacho fries at a $1. So obviously, it’s a competitive marketplace, but what I like about the Taco Bell team is they are obviously quick to respond to changes in the marketplace, and I feel good about what we’ve got on our calendar for 2018.

I want to clarify an earlier comment regarding Grubhub's coverage of our restaurants. There are two aspects to how Grubhub will serve our restaurants. The first is through click and collect during the pickup process, and we anticipate achieving strong coverage in that area quickly once everything is operational. The second aspect involves delivery coverage, for which we have specific metrics by brand. We'll provide more details on that in the future, but Greg's mention of 80% is a general figure. We'll share more specifics as our partnership with Grubhub develops.

Yeah, hi. Thank you. So just a couple of questions please. First is on the tax benefits and all the moving pieces there. You've retained the total amount of expected return to shareholders. I was just trying to understand if there is any extent to which you're reinvesting some of that tax benefit or if it was sort of contemplated in the initial guidance? And then I do have a question also just about the Grubhub partnership. We hear from other companies that franchises need to see a certain level of incrementality for these partnerships to work. Is that something that you've worked through from your perspective? It's just interesting for me to see a company like Yum! has so much experience with in-house delivery from Pizza Hut partner in sort of an outsourcing way. So just trying to understand the economics for you in the franchises.

Thanks, Sara. On the tax savings and the returning to shareholders. As you know, we're in the process of transforming Yum! into a free cash flow machine. So, we don't have any needs on cash that we haven’t been able to meet with our own cash generated. So consistent with the transformation, the plan is to return the incremental cash from tax reform to shareholders. On the Grubhub deal and the franchise economics, we did a thorough process in terms of understanding the economic impacts for franchises, understanding the different options for us. It was a really important part of this process for us to make sure that we ensured our franchises have good economics. We leveraged our scale and our marketing cloud and what we can bring to our partners. We think we have a deal; we're not going to go into the commercial terms, and we think we have the deal set up that our franchises will absolutely embrace, and it will drive incremental profitability and sales for them.

Yeah, I think in the test markets, we I think have got a couple of test markets going at the moment. Indianapolis, Louisville, and to an extent I think to Orlando. I was talking to the restaurant general manager in the test, and the good news is that they do believe they are seeing incremental occasions, and they do believe they're seeing much higher checks. I think what delivery promises in these very early test markets, the guys and girls are actually running this on a daily basis; they are seeing that benefit, we're encouraged by that and we're encouraged about expanding those tests.

Thank you, good morning. I just have a couple of questions. So, first Greg, are you concerned that Grubhub having a stronger competitive position with your investment allows more non-Yum! chains to start using delivery which would add delivery competitors for Pizza Hut?

I think that certainly the investment that we’re making at Grubhub allows them to expand their coverage, and obviously expanding their coverage gives more access, as David has pointed out, to both pickup and delivery, which obviously benefits us. We spend a lot of time on this partnership and I think you know as we said, we love the management team, we love their business model. We see this as an opportunity for both companies, and we’re excited about the opportunity for us to use Grubhub to get our brands easier access to our customers.

And obviously, our brands are benefiting, Pizza Hut included, are benefiting from the consumers embracing delivery. We’re seeing the Pizza Hut delivery business climb as a percentage of the Pizza Hut business. So, we’re excited about delivering for our Taco Bell and KFC brands and very confident in the model that we have with Pizza Hut can benefit from this change in consumer's taste.

Okay. Thank you. David, how many development commitments were associated with the stores that were refranchised during the fourth quarter?

That’s not a number that we’re going to start to get into reveal other than to say it varies by deal. Some deals where we have a lot of development opportunities, obviously we attach a lot more commitments to it; other deals where they’re in mature markets and fully penetrated, you can imagine we put less in. Our experience with the development commitments is that you don’t get 100% follow through on every single one of them, so I don’t want to start releasing numbers and then having to revise them constantly. But it’s a sizable amount; these are not just a few commitments, these are very significant commitments to building stores typically over the next three to five years.

Hi, this is Parekh Patel on for Jeff. Thanks for taking the question. A lot of questions have been asked about corporate tax reforms, but if I could just shift to the standpoint of the consumer, wondering if you guys had done any research or analysis in the past in instances where consumers saw a significant increase in disposable income, be it from past tax rate benefits or maybe the lower gas prices we saw a couple of years ago or just any color you might have would be helpful? Thanks.

Yes, we haven’t done any specific research around the tax reform but I think as you said in the past with lower gas prices, people have more disposable income in their pockets. They tend to spend it, so I think anything that ends up with people having more money in their pockets is a good thing.

Okay, sorry. Yeah, just going back to the guidance, it sounds like excluding the revenue rec changes that are a 2 to 3% increase in EBIT embedded which is a little lower than the guide for ’17. Just want to clarify I mean is that primarily because like you said that the brands that are being refranchised or is there anything else kind of changing in your view in terms of the ’18 growth rate in the business?

Well, I’ll walk you through the guidance again on operating profit. The refranchising headwinds are about six to seven points, revenue recognition is hitting us for two to three points, so those together are 8 to 10 points of headwinds. We actually get a little bit of benefit from lapping the Pizza Hut and KFC transformation agreements year-over-year from 2017 to 2018. You can see how that 8 to 10 effectively ends up being high-single digits with what we've been very consistent on for the transformed Yum! growth model.

Okay. So that refranchising headwind would have been a little less maybe in '17 than 6 to 7 is that fair?

Exactly, that's fair. Exactly. Just to clarify, we outlined the headwinds from refranchising dilution in our 2017 guidance. We've talked about that in terms of percentage points, and that was 1 to 2 points of headwinds. So that should give you the walk. 1 to 2 in '17 versus the 6 to 7 in '18.

Okay, that makes sense. And then just for our knowledge, can you explain again the tax issue with the intangibles that you mentioned and how that sort of holds back you're the downside I guess on your tax rate? And is that a cash issue or is that really a non-cash type item?

It is a cash issue. And obviously, it's a part of the tax cut that's fairly complex, and some people have talked about a little bit. Essentially, it's designed for income that you have offshore that is not coming from tangible assets, it's coming from intangible assets. It's an offset to the benefits we get from the territorial tax system. We're obviously digging into all of this trying to better understand, and as I mentioned it will have delayed applicability to us because a lot of our international entities are tax years. We will have more to share on that as we go forward.

Alright. Thank you very much everyone for joining us, and with that, I'll turn it back over to Greg.

Yeah thanks Dave. So, thank you all for joining us on the call today, I appreciate it. I think in summary, I'd say that Q4 was a solid finish for the strong year. We've made great progress on our transformation. I think the keys of the underlying growth remain strong in the business. We're obviously very excited about our strategic partnership with Grubhub. And that's all to ensure that we are distinct, relevant and easy. Thanks for joining us everybody.