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Executives

Tim Jerzyk - Senior Vice President of Investor Relations and Treasurer

David Novak - Executive Chairman, Chief Executive Officer, President and Chairman of Executive/Finance Committee

Richard Carucci - Chief Financial Officer

Analysts

Keith Siegner - Crédit Suisse AG

Jeffrey Omohundro - Wells Fargo Securities, LLC

Larry Miller - RBC Capital Markets, LLC

John Glass - Morgan Stanley

Michael Kelter - Goldman Sachs Group Inc.

Andrew Barish - Jefferies & Company, Inc.

David Tarantino - Robert W. Baird & Co. Incorporated

Jason West - Deutsche Bank AG

Sara Senatore - Sanford C. Bernstein & Co., Inc.

John Ivankoe - JP Morgan Chase & Co

Mitchell Speiser - Buckingham Research Group, Inc.

Jeffrey Bernstein - Barclays Capital

Steve West

Joseph Buckley - BofA Merrill Lynch

Gregory Badishkanian - Citigroup Inc

David Palmer - UBS Investment Bank

Yum! Brands (YUM) Q1 2011 Earnings Call April 21, 2011 9:15 AM ET

Operator

Good morning. My name is Tina, and I will be your

conference operator today. At this time, I would like to welcome everyone to the Yum! Brands First Quarter 2011 Earnings Conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Tim Jerzyk, Senior Vice President of Investor Relations.

Please go ahead, sir.

Tim Jerzyk

Thanks, Tina. Good morning, everyone, and thanks for joining us this morning. This call is being recorded and will be available for playback. We are broadcasting the conference call via our website, www.yum.com. 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 also 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 earning 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 to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call.

Finally, we would like you to be completely aware of 2 upcoming Yum! investor events. Wednesday, July 13, our second quarter earnings will be released and will follow with a call in the next morning. Wednesday, August 3, we will host a YRI Investor Day in Dallas, Texas. Thursday, September 8, we will host our China Investor Conference in Shanghai.

On our call today, you will hear from David Novak, Chairman and CEO; and Rick Carucci, our CFO. Following remarks from both, we will take your questions. Now I'll turn the call over to David Novak.

David Novak

Thank you very much, Tim, and good morning, everyone. Let me first start by addressing the tragic events that continue to impact people in Japan. We're relieved that our people are safe and that none of our team members were among the thousands who lost their lives during the earthquake and the devastating tsunami that followed. Our thoughts and our prayers are with our Japanese partners as our people recover from this tragedy, and a special thanks to our Japanese partners there who just have been working round the clock to make this be as least of an issue as possible for our people, and they've done a great job.

Now if you recall in 2010, when we said that it was perhaps our best year ever as a public company and as a result, we entered 2011 with a solid momentum. I'm pleased to announce that our 2 major growth engines, China and Yum! Restaurants International continued to produce strong results in the first quarter. In fact, China's results were simply outstanding. These results have -- were dampened by U.S. profits driven primarily by negative publicity from false claims against the quality food we have at Taco Bell. Otherwise, we would have had a double-digit EPS growth quarter excluding special items.

Now on to our strategies. Let me start with our China business where our strategy is to build leading brands in every significant category. Rick Carucci and I just met with the team in Shanghai and believe me, we are making it happen.

Operating profits grew 18% prior to foreign currency translation benefit and same-store sales jumped a remarkable 13%. Combined with the 12% increase in units, system sales grew 24% for the quarter. Even more impressive, same-store transactions increased 15%, which is our largest increase in transactions since 2004. This exceptional increase in traffic gives us even more confidence that our category leading brands are stronger than ever and well positioned for a sustained growth ahead.

Our KFC business just keeps getting stronger. Same-store sales grew 14% in the quarter, and we continue to make good progress growing average unit volumes with 24-hour operations, delivery service, and we're building a solid Breakfast business. We added 78 units in the first quarter and now have over 3,300 KFCs in China, which is 2,000 more restaurants than our nearest competitor.

Our business continues to expand deep into China, striking a balance between KFC classics and menu offerings unique to the Chinese taste like congee for breakfast and rice-based entrées. We had breakfast at KFC, and I tell you, the products are just fantastic. Continuous product innovation and operational excellence keeps the brand vibrant. It's growing and extremely profitable.

Now onto Pizza Hut. Pizza Hut Casual Dining in China continues to be a huge success story. We had another fantastic quarter, delivering 12% same-store sales growth. This marks our fifth consecutive quarter of double-digit same-store sales growth at Pizza Hut Casual Dining. Our Pizza and more positioning, backed by our strategy to refresh the menu every 6 months, as well as offering compelling value is resonating with our consumers in driving results.

We have more than 530 restaurants in over 130 cities, and we added 13 new locations in the first quarter. Clearly, Pizza Hut is well positioned for a sustained growth ahead. We also continue to make progress developing our emerging brands. Pizza

Hut Home Service now has 120 units in 11 cities and East Dawning, our Chinese fastfood brand, has 21 units in 4 cities. Angela Loh, our East Dawning General Manager and her team, are working hard in improving unit economics with the goal of developing a successful national brand.

Additionally, we own 27% of Little Sheep, the leading brand in the Hot Pot category, which is the largest casual dining category in China.

In summary, our China business continues to fire on all cylinders. We've never been more confident in the strength and growth prospects of our business. Hats off to Sam Su and his world-class team who are clearly delivering dynasty-like performance for each of our brands. I don't know a lot of Chinese, but I do know the phrase, [Chinese], which means build more.

Next, Yum! Restaurants International, YRI, where our strategy is to drive aggressive international expansion and build strong brands everywhere. YRI produced solid results in the quarter with system sales growth of 6% and operating profit growth of 8%, prior to the benefit of foreign currency translation. Same-store sales increased 2%, and restaurant margin improved 1.4 percentage points.

New unit development, which like China is a key driver of growth for this business, continued with 131 new units this quarter. Over 90% of these units were opened by our strong network of franchisees. Overall, we continue to expect to open about 900 units at YRI for the full year. We remain very focused on development in emerging markets. 90 of our 131 new restaurants this quarter were opened in emerging markets, where YRI now has 6,400 restaurants across 67 countries, a level that is unmatched by our competitors.

I'm particularly pleased with our performance in the world's second largest emerging market, India, where we're investing capital as well as planning for a significant franchisee development. Our business in India grew system sales over 40% in the first quarter, including 13% same-store sales growth. The big news is our KFC business, where we now have 108 restaurants. Remember, crossing the 100-unit threshold is a significant milestone that enables accelerated growth.

The India team has gone to school in the China business and is following the same road map by developing dayparts and tailoring the menu to local taste. For example, we have a delicious line of vegetarian products. My favorite is the Zinger vegetarian sandwich, which is fantastic. And we're building a significant beverage layer with tremendous variety in both hot and cold drinks through our Krush Bar, which we're treating as a restaurant within a restaurant. Basically, a specialty store as a beverage center. We also have world-class operations that bring it all together.

Overall, I'm absolutely delighted at how Indian consumers have taken to our brands and extremely optimistic about our enormous future growth opportunity in this country.

Speaking of opportunities in emerging markets, I just spent 2 days in Jakarta, where KFC and Pizza Hut are Indonesia's leading brands. And with over 240 million people in the country, we like our position there. Indonesia is the largest KFC developer in YRI, and we just opened our 400th KFC last week. We have 4x as many restaurants as our nearest competitor in a commanding market share.

Our Pizza Hut brand now has 200 restaurants in the country. It took nearly 20 years to reach our first 100, but only 5 years to build the next 100. Another example of that magic in reaching 100 units in a country. I was told by our franchise partner, Stephen McCarthy, that the definition of pizza in Indonesia is Pizza Hut, followed by a comma and then Pan Pizza. And after spending a day with Stephen and seeing some of the best restaurants in the world and the energetic teams that they have there, I'll take his word for it. Even with over 600 KFCs and Pizza Hut restaurants combined, we only have 2 restaurants per 1 million people in the Indonesia. We're clearly on the ground floor of growth in this emerging market.

In addition to our growth opportunities with KFC and Pizza Hut, we believe that Taco Bell will become Yum!'s third global brand. We've entered 10 new countries over the past 2 years and expect to enter 4 more this year. Now building the brand in a new country is not easy, but we're betting that Taco Bell will be a long-term growth driver.

In summary, YRI growth and development is on track and delivering solid results. We're pleased with the progress we're making with same-store sales growth and restaurant margins. Longer term, we continue to build our category-leading position in emerging markets, and look for a continued growth ahead.

In the United States, we had a challenging quarter, no doubt about it. Same-store sales fell 1%, and our restaurant margin has declined 1.6 percentage points. Taco Bell, our most profitable U.S. brand, began the year with strong momentum and grew same-store sales 4% in the first period. Unexpectedly, as I mentioned earlier, our positive sales momentum was reversed when we were thrown a curveball with the false claim around our food quality. This impact has lingered longer than we anticipated, given it was an imagined story versus reality.

What has happened is that research shows our heavy users are basically maintaining their frequency, and remain very loyal to Taco Bell. However, light users are staying on the sidelines for the time being, and have reduced their purchase frequency. As a result, our overall reach has narrowed slightly but enough to impact sales trends significantly and take the fun out of the business. The good news is that this is a meritless lawsuit, and it was withdrawn by the Alabama law firm after reviewing the facts. The team will leverage this event and is working on other solutions to recapture the sales momentum we had at the beginning of the year.

So let me wrap this up. All things considered, we had a solid quarter. China is stronger than ever and continues to be a tremendous growth engine. YRI performance was solid, and the U.S. results are disappointing. As we look forward, we are very excited about our position as a leader in emerging markets. We also remain confident that 2011 will be the 10th consecutive year we achieve our annual target of at least 10% EPS growth.

Now let me turn it over to Rick Carucci, our CFO, who will take you through the numbers.

Richard Carucci

Thank you, David, and good morning, everyone. Today I'm going to focus on 2 areas. First, I'm going to give some context to our first quarter results. And then, I'll discuss the outlook for the balance of 2011. As David mentioned, our first quarter results were a tale of 2 cities. Our strong international results offset negative performance in the U.S. and helped us deliver EPS growth of 7%, excluding special items. On the positive side, foreign currency translation for both YRI and China provided about a $12 million pretax benefit or roughly a $0.02 EPS benefit. On the other hand, our tax rate was 27.1% compared to 25.7% last year. This was about a 2% drag on our EPS growth.

Now let's take you through each of the divisions. China produced another outstanding quarter driven by new unit development and transaction growth. This allowed us to grow profits 18% prior to foreign currency translation, while taking modest pricing actions towards the end of January. Our check during the quarter actually declined slightly as we also offered compelling value for breakfast and snacking occasions at a time when Chinese consumers were sensitive to rising prices.

We ended the quarter with a healthy 25% restaurant margin. This is a 1.5 point decrease from the record levels posted in the first quarter of 2010. As expected, about 1 point of this decline was commodity and wage inflation, while the business tax had an impact of 0.5 point as well. But overall, as CFO, I was quite satisfied with the 25% first quarter margin in China.

Next, Yum! Restaurants International posted a solid quarter. We grew system sales by 6% prior to foreign currency translation and improved restaurant margins 1.4 percentage points. Sales growth was led by a significant strength in our emerging markets and YRI's less developed markets. We had strong sales results in India, Africa, France and Germany. Margins benefited from a continued strong performance from our KFC businesses in the U.K., France and Thailand. Our Pizza Hut U.K. and KFC Australia businesses were a drag on first quarter restaurant margins and operating profits.

We are preparing the launch of a new menu and service proposition for the Pizza Hut U.K. Dining business. Based on test results, we are hopeful this will improve base business performance in the second half of the year. We also plan to re-franchise about 100 Pizza Hut units in the U.K. this year.

At KFC Australia, we are encouraged by the introduction of the Streetwise value menu that took place in the back end of the first quarter.

Finally, the U.S. division had a disappointing first quarter. We saw a 13% profit decline and a 1% drop in same-store sales. As David mentioned, clearly, the publicity from the lawsuit against Taco Bell had a negative impact on sales. We were surprised by the magnitude and the sustained nature of the sales impact that this event had on our business.

The U.S. first quarter results also reflected lower sales and a negative year-over-year re-franchising impact to Pizza Hut. On the whole, our U.S. restaurant margins declined 1.6 percentage points versus prior year. This was due to inflation, as well as an unfavorable menu mixture driven by value initiatives.

Unfortunately, we do not expect the second quarter in the U.S. to get better. In fact, we believe it will be the low point of the year for the U.S. segment. We have not yet been able to reverse the negative sales trend at Taco Bell. If anything, sales have gotten a little bit weaker since the end of the quarter and it is difficult to predict exactly when we will break this trend. We are hopeful that the withdrawal of the lawsuit will be the first step towards sales recovery.

Now let me talk some more about what we expect for the rest of the year. Despite some tough sledding in the first half in the U.S. and some inflation headwinds, we expect 2011 to be another strong year for Yum!. China will once again be Yum!'s leading profit driver for the full year. I was just in China with David, and I agree that the China business is stronger than ever. I was particularly pleased with the strong development performance. Not only do we open 92 restaurants in the first 2 months of the year, but the profitability and returns of the new units that we have recently opened remain very strong. It is great when you get to see both quantity and quality in new unit development.

Despite our strong sales growth in China, we still face some profit challenges during the balance of the year. The commodity and labor inflation we saw in the first quarter will continue. We are now estimating commodity inflation of about 7% for the full year. As a reminder, we had already increased our labor inflation estimate to the mid-teens during our comments last quarter. We will also be overlapping the $15 million profit benefit of our participation in the 2010 World Expo in Shanghai. This will have its strongest impact in the third quarter.

Fortunately though, we have the benefit of strong sales growth. And as David outlined, our 2 leading brands are stronger than ever. While managing inflation is a challenge, we do not believe that it weakens our competitive advantage in any way. Higher wages improve the purchasing power of the Chinese consumer and make our brands affordable to more people.

Also, as we demonstrated in the first quarter, our full-day menu offering and our broad national penetration provide us with more options for managing inflation than our competitors. When you put it all together, we expect 2011 to be a strong year of sales and profit growth.

At Yum! Restaurants International, we've gotten off to a solid start and we expect that to continue for the remainder of the year. In terms of headwinds in that division, we expect Japan profits to be down $3 million to $6 million due to the impact of the tragic earthquake and tsunami. In the third quarter at YRI, we'll incur the expense of our biannual franchisee convention.

Commodity inflation has less direct impact in this division due to the fact that 90% of the business is franchised. However, the improving global economy, strong performance in emerging markets and new unit development should all combine to drive sales and profits for the remainder of the year. As a reminder, at YRI, we expect our new units to drive about 1/2 of our profit growth for the full year.

Finally, in the U.S., we expect our performance to recover after it bottoms out in the second quarter. Given the value-conscious consumer in the U.S., high gas prices and high food inflation, we know it's going to be a challenging year. Clearly, the key to our improvement in the U.S. relies heavily on our ability to turn around sales trends at Taco Bell. We do have a favorable G&A comparison in the fourth quarter due to higher-than-normal costs in 2010.

Overall, we'll be very focused on managing our costs in every area of our business. Our re-franchising efforts in the U.S. this year are largely focused around KFC. Our goal remains to reduce KFC company ownership from the current 15% level to about 5%. We only re-franchised 9 units in the first quarter, but we expect to pick up the pace in the balance of the year. While it's unlikely that we will reach the 5% level by the end of 2011, we do expect to make meaningful progress towards that goal. Please remember our biggest priority in re-franchising is to ensure that we find the best operator for our brand.

So when we look at China, YRI and the U.S. together, here are our quarterly profit expectations: We expect a rough second quarter in the U.S.; we have some modest year-over-year overlap challenges in China and YRI in the third quarter; and we expect strong across-the-board growth in the fourth quarter. We certainly faced some profit challenges this year, it looks like it will be a bumpy year and a more back-end loaded profit year than I originally expected.

However, I have a lot of confidence in the Yum! business model. I feel better than ever about our China business and take comfort knowing that the strongest brands fared the best during inflationary times. YRI is on solid footing with an improving global economy and a powerful development engine. The U.S. is going to be a challenge but I know that Taco Bell is a powerful resilient brand and that it will bounce back.

I feel very fortunate that we have such a strong global portfolio. Despite a few bumps in the road, I remain confident that we'll end the year in a stronger position than when we started. I am also confident that Yum! will deliver at least 10% EPS growth in 2011, excluding special items. This will mark the 10th year in a row of our keeping our target. Back to you, David.

David Novak

All right, great. Thank you very much, Rick. And why don't we open it up for Q&A?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc.

I wanted to ask about the China same-store sales growth, which is phenomenal. Just kind of what you see is the drivers, whether for example you saw a difference in Tier 1 or 2 cities versus 3 to 6? Whether -- it seems like maybe you took some pricing, but yet because of promotions, Czech [ph] was down. Does that mean you kind of cracked the code on some of inside of marketing campaign that could be sustainable and you could drive sales? Just kind of some context around how you think you got there and what you think is sustainable.

David Novak

I think the biggest thing that's going on right now is that we obviously have a tremendous operating team in China and operational excellence is the name of the game there. 80% of our restaurant managers have at least a college education, and they're -- we're very focused on leveraging our assets. And I think the great news for China is we're at the ground floor in 3 emerging segments out of the KFC asset. And that is: #1, breakfast, we're still way under 10% in terms of mix of breakfast, yet we've got a tremendous value menu for breakfast, RMB 6 fantastic products, and breakfast is a growth segment for us; #2 is home delivery. Most of our restaurants in China are not drive-through because they are basically in-lines because of the dense locations. But home delivery in effect is the drive-through vehicle for those units and it's doing well. So home and business delivery, being able to take our products to the customer is working for us. And then I think the third thing that is driving our business performance is the expansion of 24-hour service. And so, if you'd look at 24-hour service, home delivery and breakfast, these are 3 significant ways to leverage our asset that we're in the early days on, and we think that the growth that we will get from these segments will be sustainable. The other thing that the team has done an excellent job of is really offering a great value in our core business as well. And all of the brand majors that we have are moving in the right direction. So that's KFC. Do you have anything to add on KFC, Rick?

Richard Carucci

I would just add regarding your question around the tiered cities, is that, we had strong growth across the board. It was especially strong in the smaller tiered cities which outperformed the Tier 1 and Tier 2 cities, but we were pleased with the performance everywhere. And to build on David's point about snacking and breakfast, I mentioned in my speech, we felt we had some good value initiatives there, which we will continue throughout the rest of the year.

Michael Kelter - Goldman Sachs Group Inc.

And then on China, you also made a point to translate for us the phrase, build more. I guess, does that imply that maybe you might accelerate your expansion there because even with that phrase translated, you haven't necessarily done it in the last year or 2?

David Novak

Yes, I guess 550 restaurants is not that much expansion. I think we're pretty happy with our rate of development. We're not making any announcement that we're going to accelerate any further than that. But we continue to build people capability. The great thing is that our unit economics continue to be fantastic, not only KFC but even more so now with Pizza Hut because that brand has been dramatically turned around and through the additional variety that we've offered in the casual dining format and the everyday value proposition. So I think in total last year, we did I think 507 restaurants. We're basically in that camp this year. We have great unit economics, and we'll continue to grow as the opportunities present themselves.

Richard Carucci

Just to build on David's point, with the Pizza Hut brand, those who recall, a couple of years ago, we were struggling a little bit with our second units in Tier 3 cities. And now, the good news is those are performing better. And in fact, our early Pizza Hut performance in Tier 4 cities is also strong. So we do think we have a bigger opportunity to grow units in Pizza Hut than we had historically.

Michael Kelter - Goldman Sachs Group Inc.

Thank you very much.

Richard Carucci

You bet.

Michael Kelter - Goldman Sachs Group Inc.

Thanks, Michael.

Operator

Our next question will come from the line of David Palmer with UBS.

David Palmer - UBS Investment Bank

Thanks. Obviously, China was very strong, and I wonder how we should be thinking about that business for this year? Obviously, the traffic number was a little bit higher than the same-store sales and I understand you did some value in the quarter. Is this a kind of year that you're going to be -- you have a strategy that you've sort of discovered here in the first quarter that you're going to stick with, where you're pushing value, perhaps holding back on pricing, this is going to be something that resonates with the consumer in a world of inflation over there and perhaps holds you in good stead for even future years, and you're willing to sacrifice some profitability to do that? Or is this more of an extreme version of the P&L impact that we should expect in future quarters? In other words, value may not be as much of a focus in future quarters and perhaps of which you expect moderating same-store sales and better profitability?

David Novak

I think, David, the value proposition for KFC, Pizza Hut, our brands, is always going to be paramount. Because what we want to do is make our brands as affordable and ubiquitous for all Chinese customers as that economy continues to bring in more and more users to our brands and just more and more consumers to the countries. So value is something that will be ongoing and something that we will always make a major priority. I think the big thing that we've unlocked is the power of the asset that we have, through the development of breakfast, home delivery and 24-hour service. And this is driving the vast majority of our growth that we have. And as I mentioned earlier, we're really on the ground floor of each of those segments. And so I think the combination of the value plus the asset leverage puts us in a very good shape to continue to drive same-store sales and traffic over the long term. Now obviously, the kind of traffic growth we had this quarter is amazing. And so, we're not saying that's going to happen. But we definitely believe that the China model, the China growth model as it relates to Yum! is in great for years to come.

Richard Carucci

I would say versus our typical model year, we have smaller same-store sales growth and less inflation. This year, we expect to have more inflation and more same-store sales growth than our typical model. Our typical model is about 4% to 6% rate of same-store sales. I do expect this year it'll be more than that, but we need it because of the inflation.

David Palmer - UBS Investment Bank

And if I can just make a comment about the whole Taco Bell situation and that is that, the fact that you could have what seems to be, with inflation heating up, Taco Bell should have been questioning it this year. I know your team was excited about the innovation pipeline that you have in place. I feel bad about for your franchisees, who are independent business people, the suppliers, that this year is playing out the way that it is. What sort of plan b are you guys implementing there, given the fact that the brands in the different place, maybe you're not going to be trying to do as much innovation trade up as you might have been? What adjustments are you making to the marketing at Taco Bell?

David Novak

Yes. Well, thank you for your comments, David. It's just been an absolute outrage frankly. For now, what we're doing is we're focused on just running great restaurants, serving great products and just reassuring our customers about the quality and integrity at Taco Bell. Unfortunately for the lawyers, they picked the wrong corporate pocket, okay? And I'm really proud of Greg Creed and the Taco Bell team for standing up to this ridiculous case. Clearly, this was a case where we were sued first and asked later. They made false statements about our products. We provided them and the court with statements from our suppliers and our labs, and they dropped the case, which is extremely rare and is proof positive that we are in the right here. There were no charges, no money, no releases, they just dropped the case. So we got -- the story is now getting out, and we think that is good news. In terms of our marketing strategy, we're looking at a number of different ways to really lift the brand up from this unfortunate situation that was caused by the law firm. And we have a good calendar, a strong calendar. And what we're going to do is we're going to get back, focused on executing that calendar and listening and responding to the voice of the customer. We're looking at all of our options right now on how to deal with the situation. But the great news is that, as you know, Taco Bell is a great QSR brand with no significant national competitor. And we're going to get back to just doing what we do best, and that's selling our food and giving customers great service. And so, we're optimistic that we will be able to get the business turned around, but we've got some work to do. As I mentioned earlier, the heavy user is very loyal to us and is basically, stuck with us to a good extent. But we've lost our light user base, and that's reduced our overall reach. We got a -- hopefully the dismissal of the suit is the first step of us beginning to get our entire franchise back where it ought to be.

David Palmer - UBS Investment Bank

Thanks, David.

David Novak

Thanks, Dave.

Operator

Our next question will come from the line of Jeff Omohundro with Wells Fargo.

Jeffrey Omohundro - Wells Fargo Securities, LLC

Thanks. Just another question on China. As we think about the past, many years, in China building scale, with focus on rapid unit growth and increasing asset utilization. I'm just wondering, in the context of a much higher inflation environment, what you're views might be about opportunities, perhaps to initiate programs to improve cost management, perhaps in areas such as labor scheduling, food cost, the classic areas that perhaps could be new opportunities for the brands in China?

Richard Carucci

Well, obviously, we're looking at ways to improve our cost structure. As David said, they are very good operating team and they are always focused on how they could get more and more efficient on the -- as a reminder, too, it's one place where we do own our distribution system. So it does allow us to manage costs more directly in that area versus other folks. But as I said, I've said a little bit in my speech and I've said before, we do not fear this high-growth, high-inflation scenario. We actually don't fear that because we think we have more leverage to pull in managing inflation than the typical companies out there. As David mentioned, we have 24-hour, the breakfast, et cetera. We also have a national reach, so we can have a slightly different strategies in different parts of the country. We have been planning, and I think we're going to continue to plan that labor inflation is going to be there for a while. I'm personally less sure the commodity inflation will be there forever. Supply and demand tends to work, I think there's still a lot more productivity in the supply chain in general in China and its suppliers can get more productive. So clearly, we're going through an inflation bout now. We could handle it if it's ongoing. I'm just not sure if it's going to be ongoing.

Jeffrey Omohundro - Wells Fargo Securities, LLC

Thanks.

David Novak

Thanks, Jeff.

Operator

Next we will hear from the line of Jason West with Deutsche Bank.

Jason West - Deutsche Bank AG

Yes. Thank you, guys. Just wondering when you said, second quarter would be kind of the low point for the U.S. business. So what context do you mean there? You mean in terms of year-over-year EBIT growth or do you mean sequentially, or sort of getting a little bit more color on what you mean by that?

Richard Carucci

Yes, probably in most areas. But in terms of year-over-year profit growth, even though you saw the first quarter was weak, we expect the second quarter to be worse. As I sort of mentioned, we're more dependent on Taco Bell than we've been historically. The sales trends, although we're lapping a little bit harder numbers in the second quarter, I did mention that since the end of the quarter, our year-over-year trends have actually gone a little bit worse than what you saw in the balance of the first quarter. So based on that, that's going to impact our profitability in the second quarter, and KFC had a decent second quarter last year. And so therefore, our U.S. business clearly we believe we'll have even lower profitability than it did in the first quarter year-over-year.

Jason West - Deutsche Bank AG

Okay. And then, I guess, I'm a little surprised that Taco Bell has weakened as it's gotten away from the lawsuit. Do you think there's any other issues going on out there with the QSR consumer and that are new any way in terms of gas prices or whatever it may be?

Richard Carucci

Yes. I mean, clearly, that's another factor. But It's very clear, if you look at the sales trends, it was very clear that the cause of it was the publicity around the lawsuit. This is an example, we were running set plus 4% in the first 4 weeks of the year. The next week was down a little bit from that because of the weather, but we clearly saw that in areas that the weather wasn't bad, our sales were very strong. So it's only in areas where the weather was bad. And then, since then, it's been down. But probably the 1 thing that was a little bit of bad luck in the process is that we were running shrimp during Lent. And we think that was the right program at that time, but we had also committed to buying the shrimp during that period of time. And we were planning on that being a big driver. That turned out not being the case. We probably would have been better off if we had, had a lower price promotion at that point in time. But other than that, I don't see anything that we really could have done differently. Going forward, as David said, we're looking at all of the options. And I think we have a decent calendar, and I think some of the stuff just takes time. So we just need a little bit of time to get further away from the event. And the publicity piece of it is the leveraged on the front end, we'll see how -- whether that has an impact or not. That lawsuit was just dropped a day or 2 ago, so it's too early to tell whether that will have an immediate impact on our sales.

David Novak

Yes, I think what happened to us, as you know, is that the plaintiffs lawyers originally generated a ton of press coverage, giving press interviews and press releases and containing statements about our products that were just absolutely plain wrong and statements far beyond what they even included in their lawsuit. And unfortunately, the press gives far more coverage to the filing of the suits and the making of the claims than it ever gives that the fact that the lawyers have now given up. So while we dismissed the suit in terms of the ledger, or the communication it's going to be hard to get even. Okay? And so I think it's going to take us a little time. There's no question, in our industry, having high gas prices is not great. So I think all of us are working hard on making sure our value equation is right. But the basic Taco Bell brand is strong. And you can do -- it is so clear that as soon as that lawsuit hit, our sales took a dip. I mean it's absolutely correlated and then we track our users and our purchase frequency and intent to purchase throughout this process and during the Lent and the shrimps promotion, it was down. And it had nothing to do with the shrimp, it had everything to do with that damned lawsuit. And so that, to me, is what we're dealing with right now and we got a great team working on it and we'll get back. We are the value leader, and that's an important thing to be when gas prices are close to $4 so that's a big plus for us. And so, teams are working on how to dimensionalize that value as we go forward. So we like where we're at. We just been kind of put in the basement for a while. And now, we can get our head up and move forward. But the good news on this, I think it really has allowed us to tell everybody in the world that you're proud of our products, and we are.

Jason West - Deutsche Bank AG

Okay. Thanks for the color, guys.

David Novak

Thanks, Jason.

Operator

Your next question will come from the line of Joe Buckley with Bank of America.

Joseph Buckley - BofA Merrill Lynch

Thank you. Given that you have higher food costs expectations in China, how are you thinking about pricing going forward? And what is the political social sensitivity that's taking place in China at this point?

Richard Carucci

Well as a reminder, for everybody in what we've done so far, we took roughly about a 3% price increase at the end of January. And at that point in time, we thought it was going to cover about 3/4 of the inflation for the year. To your point, given that inflation has gone up, it's probably went more like 60% to 65% of the inflation for the year. So we we'll have to assess everything later in the year. We're not planning on doing anything in the next several months. We like what we've seen from the sales and transaction perspective, and we think we've got the overall profitability and value equation pretty good right now. But we'll assess later in the year and look what our options are then.

Joseph Buckley - BofA Merrill Lynch

Rick, from a political or social standpoint, is there a lot of pressure not to take price in China?

Richard Carucci

We'll, we were probably late on our last price increase relative to other people, so we didn't feel any resistance when we took our last pricing increase. Obviously, there's been some feedback that other companies have gotten from the government, and that's something we'll keep an eye on.

David Novak

I think the biggest pressure we feel, Joe, is just the pressure to make sure that we're affordable to the emerging consumer. And that's why we like our equation right now, is that we're looking for ways to make our products and our brands more and more accessible. One of the reasons why Pizza Hut is doing so well is that it's eat like a rich man, eat like a poor man. We advertise it that way. We got something for the everyday consumer. To go into KFC and get a and we've got RMB 6 breakfast that I'm telling you is absolutely delicious and filling, that's great. That's where we want to go. I mean, If we can figure out how to take our prices lower, okay, especially with the kind of margins we have, that's where we want to be. And we want to make sure that our products are affordable as possible. We like our position and we like the formula that we have right now.

Joseph Buckley - BofA Merrill Lynch

Guys, just a quick question on YRI as well. Same-store sales are a little bit better, but you still seem to be guys lagging, a lot of other companies, international businesses. And, I guess, I'm curious, is KFC versus Pizza Hut issue or is it more of the emerging markets versus developed markets?

David Novak

I think it's, If you look at the numbers, it's more of the weakness that we have in the developed markets versus the emerging markets. Our emerging markets story is extremely positive, and that's the real growth engine for our company. We've been soft and a little of both on the brand side and we 2 developed equity markets that are taking a little bit of the -- putting the damper on our performance. KFC Australia has been underperforming as has Pizza Hut U.K. And those are the 2 markets. In the second half of the year, we expect to -- we've got a relaunch of the Pizza Hut brand and the value proposition in the U.K. And in Australia, we have some very good sandwich-type news that we're hopeful is going to be able to turn the business around. Because there, we have a very strong portable business and we've got news that we think that will lift the brand up. So it's -- our emerging story is strong, our developed markets particularly with the 2 countries I talked about right now are the issue that we're dealing with.

Operator

Next we will hear from the line of Greg Badishkanian with Citigroup.

Gregory Badishkanian - Citigroup Inc

Great. Thanks. Hey, just on China again, how much of the improvement in acceleration same-store sales do you think was due to the initiatives that you talked about versus maybe just the overall industry just picking up?

Richard Carucci

I don't know how to answer that. Yes, I don't know if I have anything better. I think it was a bit of both. Clearly, I think we had some very good initiatives. I think we benefit from having a national presence because the growth as I mentioned before, was a bit better in the outer tier, so I think that probably helped our relative performance. I think it was -- been of both [ph]. Clearly, as we started to talk about it, we're fairly focused on the same-store sales. But when we look at China, we also look at system sales because again, we're very heavily development dependent and focused because we want to keep building our business there. So when you look at those 2 combined and you have 24% systems sales, clearly, that's more than the category and I've mentioned that our development numbers were very strong in the first quarter. So we'll continue to build on our more than 2,000 lead versus McDonald's.

David Novak

We'll just choose -- this quarter, just to say, it's all our doing. I mean, the beautiful thing about this and the reason we obviously, were excited about China is hey, the macros longer-term are better there than in other parts of the world. And so, it's nice to have that as a headwind. And that to me -- we just hope that keeps me on going. The more that economy's booming, the more consumers are buying our products, we're in the right place at the right time. Sometimes, I say is you're better to be lucky than good. In this case, hopefully, we're good and lucky.

David Novak

Well, you've done a really nice job there.

Operator

Next we will hear from the line of Jeffrey Bernstein with Barclays.

Jeffrey Bernstein - Barclays Capital

Great. Thank you. Just I guess a two-part question. First on the food cost side of things. It seems like you guys are not alone in terms of raising your the inflation forecast as we move through the year. It looks like you raised both China and U.S. by a couple hundred basis points in terms of the basket since just last quarter. I'm just wondering, what kind of visibility you have on that front locked versus floating. And the potential that there's pressure from here and then it goes up another couple of points over the next several quarters, and just kind of wondering about the U.S. and China, your visibility and comfort on that level. Well just kind of a natural follow-up, I mean, I think we heard you said in China, you got about 3% pricing running through. I'm just wondering you said you're not doing anything in the near term. How about in the U.S. in terms of kind of the right pricing level? And I guess for both U.S. and China, how much pricing would you need in an ideal world to actually protect your margin? I mean, putting up tremendous comps in China, still seeing the margin pressure and just kind of figure out, in this environment and inflation, how much pricing would you actually need?

Richard Carucci

If you look at the exposure this year, I think at this point, it's pretty modest versus our estimates. So it could probably go up a point or 2. I would think pretty at the most because we're starting to get more and more locked in obviously, as we're getting deeper into the year. The bigger issue is what happens to the trends going forward because that's really going to influence what our pricing is. It's not necessarily going to cover what occurred this year, but are those prices going to continue going forward. We don't have a lot of visibility to that right now. Clearly, in this you environment when you have the inflation, in the U.S. I'm talking about now, when you have inflation and your sales are soft, you have to play it pretty smartly and the teams are pretty good in doing that. Taco Bell historically has done a good of introducing newer products with higher price points, maybe higher $0.01 profit while still having great value initiatives. And they'll have to continue to do things like that at Taco Bell and love to do that in the other brands. So we'll probably take some modest pricing increases but, we'll have to still provide value at the same time.

Gregory Badishkanian - Citigroup Inc

And in terms of I guess what you're currently running in pricing and if this inflation will sustain, like what pricing would be needed to neutralize that margin?

Richard Carucci

Yes. I mean, I mentioned before and if you look at the math in China, if you take the inflation that we talked about in the commodities side and take the inflation we've talked about before on the labor side, that gives you about 4.5% or so inflation, and we've taken 3% pricing. So that's pretty much what the gap is right now.

Gregory Badishkanian - Citigroup Inc

Thank you.

Operator

Our next question will come from the line of John Glass with Morgan Stanley.

John Glass - Morgan Stanley

Thanks. 2 follow-ups, 1 is on China. In the past, you've talked about 1% to 2% of the comps coming from things like 24-hours and the breakfast, et cetera. Did that accelerate in the first quarter, in other words were there more stores open longer for some reason? Or is that still the right way to think about the 13%? And then it's a funny quarter for China and then 2 months and 1 is Chinese New Year and 1 is not. Did the trends on a comparable basis, were they pretty consistent to the quarter was this really about a very, very successful Chinese New Year?

Richard Carucci

Yes, regarding the second piece first, John. It was pretty consistent during the quarter. So we didn't have either a fantastic Chinese New Year. We just -- after, before. It was pretty much constant throughout. So we were pleased with that part of it. We probably picked up a modest amount of extra growth because of further penetration of the KFC delivery 24 hours and the performance of breakfast. So breakfast segment performed very strongly during the quarter. But most of the increase versus what you would've seen before is really just overall business performing better.

John Glass - Morgan Stanley

And can you quantify the impact of the declines or the profit impact of Taco Bell in the U.S. sort of flat. Were profits actually down at Taco Bell as a result of flat comps or was it just uplift and you saw with the other brands were then more...

Richard Carucci

Profits went down at Taco Bell.

John Glass - Morgan Stanley

Okay. Can you quantify how much of the decline of profits Taco Bell was responsible for?

Richard Carucci

More than half.

David Novak

Thanks, John.

Operator

Next question will come from the line of Mitch Speiser with Buckingham Palace.

Mitchell Speiser - Buckingham Research Group, Inc.

Thanks very much. First off, I believe you did a refi [refinance] of your $650 million in deck. Can you give us a sense of how that went? Was it with cash or did you do a straight refi?

David Novak

We just paid off the $650 million of bonds that were due in April. So right after the end of the quarter, Mitch.

Richard Carucci

With cash.

Mitchell Speiser - Buckingham Research Group, Inc.

Thank you. Next on YRI, I noticed that the G&A was up year-over-year in the first quarter. You did refranchise all of Mexico. Could you walk us through that? Do you expect G&A to go down year-over-year due to that refranchising? Or how should be model out the G&A in the YRI segment?

David Novak

Yes, I mentioned it was basically 4x driven. So that's the other side of the favorable aspect of foreign currency. You do get hit a little bit in G&A. So that was basically the reason. You get the favorable impact from Mexico and the rest of the business, they reinvested some of the proceeds, but the base business was basically flat. There was a little bit of increase due to FX.

Mitchell Speiser - Buckingham Research Group, Inc.

Okay. Thank you. And on the reinvesting, you do have an extra week this year. I believe last quarter, you mentioned you planned to reinvest it. Have you rethought that? Is there some cushion to meet the 10%-plus earnings growth by not reinvesting that extra week?

Richard Carucci

This year, we could use it as that. We haven't committed to it but our plan at this point, although we're not yet prepared to sort of decide on exactly what that will be, but our plan is that we are going to re-invest it.

Mitchell Speiser - Buckingham Research Group, Inc.

And lastly, on the U.S. business, can you give us a sense at Taco Bell of what percent of your users are light users?

Richard Carucci

I'd have to get back to you on that.

David Novak

Mitch, we don't have that handy.

Mitchell Speiser - Buckingham Research Group, Inc.

But that is you think the key reason why the comps' trends did reverse?

David Novak

Yes, we absolutely know that for sure. Yes. We just forget exactly what that percentage is.

Mitchell Speiser - Buckingham Research Group, Inc.

Okay. Thank very much.

Operator

Our next question will come from the line of John Ivankoe with JPMorgan.

John Ivankoe - JP Morgan Chase & Co

Just a couple of follow ups if I may. The first and it's been asked in a lot of ways. And I'd like to just try 1 more, is the elasticity of pricing in China. I know in your prepared remarks, you said that it is a sensitive customer to pricing and perhaps even a sensitive government to pricing. But, for example, if your pricing, if it was 5% instead of 3%, do you think that the consumer is that sensitive to pricing from an elasticity point of view? Or do you think you have more pricing power than what you're currently taking. In other words, that the traffic is there that you could take pricing and not affect the traffic levels?

Richard Carucci

Well, obviously, we make the best judgment that we think is best for overall. In terms of the elasticity, when we've taken pricing historically, and it's been inflation driven and the economy has grown, it's been handled pretty well. We do want to remind people that the Chinese customer has definitely recovered from where they were. But the Chinese consumer is still a little bit nervous. If you look at the consumer confidence level, that's 1 of the measures we look at, over the last 4 months, that measure has been a pretty weak measure. So the Chinese, we think it's driven by nervousness around housing cost, et cetera. So we do think we have to be sensitive right now that the Chinese consumer, as David also said strategically, we want to make sure that we're affordable. So I don't want people to think that the Chinese consumer is not sensitive right now to value, because we think they are.

John Ivankoe - JP Morgan Chase & Co

Okay, understood. The second question is on real estate in China and certainly I respect that 550 is a very big number to open in a given year. From the outside looking in, it's tough to know if you're still getting the access to the quality, meaning both costs and locations of the real estate that you want, are you seeing costs significantly inflate? Or Are you finding it harder to sites or are you seeing the new projects being built in the areas in which you want to go?

Richard Carucci

Again, just a reminder, our historical development numbers ended the 500 range in the last couple of years. If you look at real estate in general, we are seeing fairly large increases in rent as they become due especially in tier, especially Tier 1 cities. So in those situations, we have done more relocations and things like that because it is harder to justify the new rent that you end up paying. In the rest of the countries, rents have gone up, but not nearly to the extent that they have in some of the Tier 1 cities. In terms of access to real estate, the things that have driven historical development we think are going to continue to drive future development. And you're continuing to see huge investments in infrastructure. We saw something like something like 40 airports being opened in China. So things like that continue to occur. So we haven't seen any let up in any infrastructure investment or investment in new cities that the Chinese government has been making. And so we still see people moving from the countryside into the city. So with that, you do get you new opportunities. So what we said historically, I think it's true going forward, it's really tied to the economic growth of the countries. If the economic growth in countries we think in the units will be there.

John Ivankoe - JP Morgan Chase & Co

The final question just on Pizza Hut. First quarter is actually a very strong year for the Pizza Hut category in general, very strong year for Pizza Hut. It was actually the easiest comparison if you want to call it 5 [ph] easy. But what's the outlook for the year in that brand? I mean, do you think that you can stabilize that business against very difficult comparisons or might it get pulled down in line with the category? If the category had such an exceptional 2010, that it might just give back from that share in 2011?

David Novak

We actually believe that we can have a stable year at Pizza Hut. So we're confident in the direction, our value proposition is good. And in the past, we admittedly, we had some boom splat [ph]. We don't think we'll have a boom splat [ph] this year.

Richard Carucci

Just the way -- P&L works this year for Pizza Hut in the U.S. We were expecting about flat-type of year-end profits. As we both said [ph] some modest sales growth would offset the impact of refranchising. Obviously, we didn't have that sales growth that we wanted in the first quarter, but we also did see any boom splat [ph].

John Ivankoe - JP Morgan Chase & Co

And is there anything changing from a marketing perspective in Pizza Hut that will be notable to turnaround that trend, the Q1 trend?

David Novak

I think one of the big thing that's changing versus the past is we have continuity in terms of every the value. In the past, we have kind of moved around a lot in that arena. But the systems committed to everyday value. So that gives us a base that we never really had before. We also have a good combination of innovation and value so you'll see some new pizzas coming to the customers. And the other thing is we continue to build our early week business with the pasta and the wings. So we think we have a good solid approach on Pizza Hut that gives us the stability we need to continue to build a healthy business.

John Ivankoe - JP Morgan Chase & Co

Okay. Thank you.

Operator

Our next question will come from the line of Larry Miller with RBC.

Larry Miller - RBC Capital Markets, LLC

Two quick questions. I think you said when you were talking about refranchising KFC, and clearly, there's only a few -- 9 stores refranchised this quarter. You wanted to put it in the hands of good operators. Can you comment on the financial health of the KFC system at this point and then their ability to absorb that 11% of stores that you want to sell to them?

Richard Carucci

Well again, 1 of the things that makes KFC a little more challenging than the other brands is 1, is we started later, which we've talked about before for various reasons. The second is the existing franchisees, and we knew this going into it, having less capacity to handle more units. So some of the units, the majority of the units that we're actually selling on the KFC side are to external new franchisees, which takes a little bit longer to get financing, et cetera. Obviously, we were going through the screen of making sure that they will be good at operating the restaurants.

Larry Miller - RBC Capital Markets, LLC

But you're confident you guys can hit that target?

Richard Carucci

Yes. What we said is our target is ultimately get to 5%. So we probably won't get to that target by the end of this year, but we'll get there eventually.

Larry Miller - RBC Capital Markets, LLC

And then just 1 final question on China, clearly, double-digit traffic growth is amazing for this brand. I think as long as I've covered it and it happened maybe a few times. Is there anything different happening from a cannibalization perspective when you're opening new stores? And also can you comment on the maturity curve? Is that actually giving a greater than expected benefit [indiscernible]?

Richard Carucci

What do you mean by the maturity curve?

Larry Miller - RBC Capital Markets, LLC

So maybe the stores are opening, the stores in some in the Tier 3, 4 markets operating at lower volumes and ramping up a little bit quicker to more mature volumes?

Richard Carucci

Yes. We're not really seeing anything on the second part of the maturity curve side. On cannibalization, so far nothing really major different there. If anything, as the percentage of new builds gets lower, we get maybe slightly better on the cannibalization front just from a map standpoint. We continue to operate new cities. Of the number of new cities we'll go into stay relatively constant. So as a percentage that's going down a little bit which works in the other direction. So I would say cannibalization, if I had to put those 2 together, maybe slightly better than what it's been historically.

Larry Miller - RBC Capital Markets, LLC

Thank you very much.

Operator

Our next question will come from the line of Steve West with Stifel Nicolaus.

Steve West

In past in the U.S., you guys have dealt with a lot of challenges to some of your brands, whether it's E. coli or kind of rats in New York City and you guys have recovered very quickly and done a good job of managing it. How has the Taco Bell recovery so far? Is it trending in line with those or is it any kind of similarity to that, that kind of shows yes, it is recovering and we should see it in x months or something like that?

Richard Carucci

Yes, first of all, I'd be honest. As David said, I was surprised by the magnitude of the impact, considering it wasn't a real event. So if I look at that, I was very reluctant to look at past events because I thought this was very different. And I still think it's different. I think it's a different 1, because it's not real. It's also different because on the negative side because social different media is different today than it was historically. So I'll be honest, I don't have a good read for how this is going to play out, but I think studying in depth what happened -- we sort of look at that, I don't think the circumstances are the same.

David Novak

Yes, the circumstances aren't the same but the issue is consumers don't have to come. They can go to a lot of different places. So if you look at what's happened, our heavy user, they're extremely loyal. They love us, no issue. We've basically been able to basically keep our heavy user. But lighter users, they go to a lot of different places, they're heavy-user places. And so, that's the issue that you deal with and that's why, this bogus lawsuit was such an unfair thing to happen to Taco Bell. And our franchisees have been impacted by this significantly as have we. And so that's what we're dealing with and like I said earlier, we want to get out of the basement, out of the ditch and move forward. But we just don't know how long it's going to take us.

Steve West

Okay. Fair enough. I appreciate that.

Operator

Your next question will come from the line of Keith Seigler with Crédit Suisse.

Keith Siegner - Crédit Suisse AG

Just 1 quick question. You just hosted a bunch of us in California with Greg Creed talking about Taco Bell. You went through a number of strategic initiatives. Now that this is kind of -- the sales weakness is lingering maybe a little bit longer, does this change like the backwards integration into breakfast, does this change the remodel program timing, does it change any of the other things that we learned about? Like bigger picture, strategic initiatives for Taco Bell, does it postpone them? Anything along those lines?

David Novak

Better not. We're moving forward. We've got a great vision for Taco Bell. It's what we've talked about in the past, it's 70% of our U.S. profits. It's the second most profitable brand in the United States. We only have 5,000 units. We think we can have 8,000. We know we are long ways from that and we got to demonstrate that. We definitely believe we'll be in the Breakfast business. We definitely are in the process of remodeling, and we are very bullish on this business over the long term. We got the #1 value franchise in the business, outstanding food. And we got a cache even in spite of all this that will come back. I mean, and you go to the cocktail party and kids love Taco Bell. I mean, it's a talked about brand. And so we're extremely excited about the long-term. In this business, sometimes, you get hit with some things that you just don't anticipate. But you're absolutely right, we bounced back or whoever said that. When you've got great brands, they bounce back. There is a great history of that in our country and in the world. And if you're a great brand, you might have your hiccups but you'll come back. And this will -- we'll be waving the flag and charging the hill. But the team is focused on right now, obviously handing the short-term issue. It's unfortunate when you got to waste a bunch of your time dealing with lawyers when you should be focused 1,000% on the customer. We've had to do that. There's no question about it. But that's just a few people doing that. The real Taco Bell army is out there operating restaurants and doing the marketing. So we'll get there. And so, anyway.

Operator

Your next question comes from the line of Sara Senatore with Sanford Bernstein.

Sara Senatore - Sanford C. Bernstein & Co., Inc.

Just a quick question on refranchising. Obviously, you all have some very strong comps in some of your markets, but I'm trying to understand the margin impact, if you could talk just maybe about the U.S. and also YRI. We saw last quarter some good benefits from portfolio management for your stores, and I would've thought we might see that again this quarter. I'm just trying to understand, can you give like an estimate in sort of basis points what kind of impact your franchising might be having until you lap some of these big sales of company-operated units?

David Novak

We sort of looked at it before. We thought it would stay about a half-way benefit this year.

Sara Senatore - Sanford C. Bernstein & Co., Inc.

For both the YRI and for the U.S.?

David Novak

It's definitely U.S., Sara. YRI is a little less than that.

Sara Senatore - Sanford C. Bernstein & Co., Inc.

And then just another question on the YRI then. Can you help explain the sort of mix shift versus [indiscernible] because your food and paper costs were down, you have a very good margin expansion? What, was that all makeshift from 1 market to another or was there something else going on there?

David Novak

Are you talking about in the U.S. business?

Sara Senatore - Sanford C. Bernstein & Co., Inc.

No. YRI.

David Novak

Yes. The food cost, that is more of an impact of refranchising, just the shift in the businesses and there was -- it's just the difference in timing of inflation versus pricing put the lag on that.

Operator

Next question will come from the line of David Tarantino with Robert W. Baird.

David Tarantino - Robert W. Baird & Co. Incorporated

Quick question, Rick. I just wanted to clarify your comments on the earnings outlook for 2011. And I was just curious to know if you can handicap the degree of difficulty you see now hitting your 10% plus EPS growth target, perhaps relative to what you would have thought entering the year. I know you have a lot of strength in China, but that's being offset by some other factors. So just if you could handicap the degree of difficulty you see now, that would be great.

Richard Carucci

Well, I would say the difficulty versus going into the year is it's harder. Obviously, China sales and profits in the first quarter were in the right direction. But clearly, the U.S. impact we had was the wrong direction. So I put those 2 together and put into together that we expect a relatively weaker second quarter than what we normally do. Then it's a little harder than it normally is.

David Tarantino - Robert W. Baird & Co. Incorporated

Okay. Thank you. That's helpful.

Operator

Your final question will come from the line of Andy Barish with Jefferies.

Andrew Barish - Jefferies & Company, Inc.

Just a quick follow up on sort of if you look at the margin picture for this year, I think you guys had kind of thought about commodities, having some risk in the back half of -- I think the number globally was another $40 million. Is that now baked into the new inflation assumptions? And then, how does -- what sounds like a bit of an increase from the beginning of the year and the focus on value and the marketing and promotional messages around the world kind of enter into the margin thought process as well?

David Novak

Well, regarding the cost piece of it, I'm not sure where the $40 million contact is. But let me repeat what we said and make sure that, that addresses your question. To your point, we did take up the commodity inflation in both the U.S. and China. So we're now at roughly 7% is our best guess in China and 6% in the U.S. So those numbers did go up from what we had at the beginning of the year. And I also just said on an earlier question that we probably only have now modest risk beyond those numbers. Does that answer your question?

David Tarantino - Robert W. Baird & Co. Incorporated

Yes, that's helpful.

David Novak

Okay. All right. Well, thank you all for being on the call. Let me just briefly wrap it up. Our China business is stronger than ever, and with 15% transaction growth this past quarter, we're well positioned for sustained growth ahead. Yum! Restaurants International had a solid quarter, and we expect strong performance for the balance of the year. Our U.S. business is indeed facing a challenging year, and we expect the second quarter to be our toughest and profits to dramatically improve in the second half of the year, however. Overall, we look for continued strength of our China YRI businesses to overcome a challenging year in the United States. We remain confident that 2011 will be the 10th consecutive year we achieved our annual target of at least 10% earnings per share growth. So thank you very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may all disconnect.

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