(FORTUNE Magazine) – The past year has presented myriad threats for fast-food companies. Mad cow disease emerged for the first time in the U.S., and the diet industry's war on carbohydrates moved into high gear. Meanwhile, avian flu swept through Asia, leading to the slaughter of millions of chickens. Despite that, Yum Brands, which has some 33,000 fast-food restaurants in more than 100 countries, just posted a 6% increase in annual profits. Since PepsiCo spun off the company in 1997, its stable of brands has grown to include not only KFC, Taco Bell, and Pizza Hut but also A&W's hamburgers and Long John Silver's seafood. CEO David Novak spoke with FORTUNE's Julia Boorstin about the challenge of China, the benefits of multibranding--and loving your job in an Atkins and PETA world.

How is Yum doing internationally?

We have a tremendous business outside the U.S. Seven years ago we had $170 million [in pretax operating profit] outside the U.S. In 2003 we made about $440 million outside the U.S. China is one significant opportunity. We have 1,000 KFCs and 120 Pizza Huts there. We're the No. 1 brand in China. KFC makes almost as much money in China today as it makes in the U.S. We're ahead of McDonald's there. We dominate every category.

Will the Chinese business surpass the U.S. one?

We think we can double our penetration over the next five years. There are 450 million urban customers there. We think at least 200 million of those can afford our food. The Chinese customer loves Western brands.

How do Chinese fast-food consumers differ from American customers?

They absolutely love chicken. Even McDonald's sells a lot more chicken than they do hamburgers. The other thing that's unique about China is they love spicy food.

What is your strategy in the U.S.?

We're growing our average unit volume by offering multibranding [two or more brands under one roof]. About 15% of our restaurants are multibranded. The volume is higher than our straight business; the margins are good. We think two [brands per location] is the way to go. It allows us to do both brands in a very distinguished fashion. We find customers prefer a double-branded concept to a single brand six to one.

Are you getting slammed by the nutrition trend?

This whole move toward nutrition is real. We think we can add choice, which will allow us to grow our business. We've done this already at Pizza Hut. We just introduced the Fit and Delicious pizza. Less cheese, fewer toppings, if somebody wants a lower-fat, lower-calorie option. KFC is launching an oven-roasted line. We think if we do that, we'll be more relevant to customers. We think common sense is on our side. We've done a lot of research: The consumer does not see this as anything close to being a tobacco issue.

Why did you pull the ad saying that fried chicken is less fattening than a burger? Was the ad a mistake?

In my view, no. We talked about something that was so incredible to the consumer that they couldn't believe it. The customer thinks two chicken breasts have so many more calories than a Whopper, and they don't. What we communicated was absolutely true. Take the skin off the chicken, and it's three grams of fat for two pieces. The commercial is no longer running because we change our format every four weeks.

What about criticism from PETA?

I love our job. Do I like the fact that crazy people like PETA throw fake blood on me and march up and down my driveway when I'm out of town? No, but I love the company, my wife loves the company, and she's behind me 100%.

How often do you eat at your own restaurants?

I bet I eat Taco Bell at least three times a week, KFC one time a week. I don't eat Pizza Hut as much now that my daughter has gone to college. But we have pizza sauce and taco sauce in our veins.