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Yum! Brands, Inc. (NYSE:YUM)

Q1 2007 Earnings Call

May 2, 2007 9:15 am ET

Executives

Tim Jerzyk - Senior Vice President, Investor Relations

David C. Novak - Chairman of the Board, President, Chief Executive Officer

Richard T. Carucci - Chief Financial Officer

Analysts

David Palmer - UBS

John Glass - CIBC

John Ivankoe - J.P. Morgan

Jeff Omohundro - Wachovia

Glen Petraglia - Citigroup

Rachael Rothman - Merrill Lynch

Joe Buckley - Bear Stearns

Mark Wiltamuth - Morgan Stanley

Andrew Barish - Banc of America

Steven Kron - Goldman Sachs

Larry Miller - RBC Capital Markets

Presentation

Operator

Good morning. My name is Megan and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands first quarter earnings conference call. (Operator Instructions) Mr. Jerzyk, you may begin your conference.

Tim Jerzyk

Thank you, Megan and 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 at www.yum.com. Please be advised that if you ask a question, it will be included in both our live conference and any future use of the recording.

I would also like to advise that this conference call includes forward-looking statements that reflect management’s expectations based on currently available data. However, actual results are subject to future events and uncertainties. The information in this conference call related to projections or other forward-looking statements may be relied on subject to our Safe Harbor statement included in last night’s earnings release and may continue to be used while this call remains in the active portion of the company’s website.

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

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David C. Novak

Thank you, Tim and good morning, everybody. As you may have seen from our release last night, we reported outstanding first quarter results with operating profit growth of 12% and EPS growth of 19%. This quarter is yet another example of the power of our global portfolio to deliver growth.

The fact that we delivered this great performance in the face of negative and unforeseen incidents at Taco Bell shows the tremendous earning power of our company.

The strong trends of 2006 for both our China and YRI businesses have continued into 2007 and we continue to expand our brands in many countries around the world, building on our leading global growth track record.

I am pleased to report that on the strength of our global growth, we have raised our full-year EPS forecast to at least 11% growth, or $3.23 per share, from 10% previously.

You may recall that we said in our last quarter earnings call, we believe that Taco Bell was well on the recovery path from an E-coli issue in December when we were dealt a second blow with adverse publicity related to the rodent incident at one of our KFC/Taco Bell restaurants in New York. Believe me -- it was very painful for our dedicated team members and all of us who love our brand so much to see the video that went over the Internet. It did not matter that it was shot at 3:00 a.m. in the morning when the restaurant was closed and the franchisee was trying to fix the problem. That was the intent but the reality is it should have never happened and we take full accountability.

We have taken aggressive actions to remedy the issue and make sure that it does not happen again. We have provided the full details in the release last night.

Given our strong and loyal consumer franchise, we are extremely confident that there will not be an adverse long-term impact to the Taco Bell brand. In these situations, it usually takes six months or so to fully recover from food safety type issues. In this case, we expect to see steady improvement for the balance of the year from Taco Bell. Essentially, we have to give time, time.

Now let’s look at the overall U.S. business and talk about what we are doing to drive same-store sales and profit growth. Despite recent softness in the U.S., our expectation is for steady improvement balance of year and positive profit performance overall for the year, but below our long-term earnings target of plus 5%.

Last December at our investor conference, we talked about the fact that we look at the U.S. business as a tremendous opportunity to leverage the capacity of our existing assets, our 20,000 plus restaurants across our three big brands.

When we look at our top 10% performing restaurants in terms of sales volume, we find that they are about double the volume typical for the rest of the system. From this analysis, it is clear we have no capacity constraints in our restaurants.

Overall, the key long-term themes and our focus for improving upon how we are targeting to better leverage the existing 20,000 restaurants we have in the U.S. are: number one, add more balanced meals and choices for our customers, then expand into multiple day parts, broaden our protein offerings, create destination desserts and beverages, and ensure we have a solid positioning in everyday value, and finally, develop system-wide contemporary assets, including multi-branding, on a focused basis.

Importantly, we have not yet capped all the day parts available to our brands, particularly breakfast, and important menu variety like destination desserts and drinks. We are aggressively working against these key opportunities for the longer term at each brand, which we believe can add between $100,000 to $300,000 in sales to each restaurant over time.

In the short-term for 2007, at Taco Bell we are introducing new products like the Steak Taquito just recently, and we now are offering a limited time version of our very successful Crunchwrap which we launched in 2005. This new version is the 7-layer Crunchwrap, a great flavor variation of the highly successful original version. There will be more product news balance of the year.

We will continue to emphasize Taco Bell value for our core customers and will continue to communicate our fourth meal message to enhance our late night business.

Right now, we are testing breakfast in four Taco Bell markets. The products on the breakfast menu are delicious and Taco Bell’s position as an exciting flavor alternative for QSR breakfast.

Additionally, we are aggressively developing a line of Mexican-inspired beverages to bring to test market.

At KFC, I am pleased that we are now moving to zero trans-fats to provide an even better way to enjoy our core chicken products. We just began advertising this significant change. Coming up, we have a line extension of last year’s quick-service restaurant product of the year, KFC's Famous Bowls. Beyond that, we will continue to focus on variety and complete meals in a value context.

Additionally, as the year progresses, KFC will begin to steadily expand into late night hours.

In order to give our customers more choices, we are in the process of testing a great non-fried chicken-on-the-bone product to complement our great original recipe and extra crispy chicken.

Finally, KFC is also testing shakes and other desserts.

At Pizza Hut, you may have seen our recent commercials to support the launch of our new hand-tossed pizza. The product has clear taste superiority over our two national competitors’ core pizza products.

Additionally for Pizza Hut, we are being much more targeted with our price value offerings and actually reducing some of our local discounting. Long-term, we are continuing to work on leverage our Pizza Hut/WingStreet multi-brand combination and to scale the opportunity for both our delivery carry-out units as well as our dine-in locations.

To summarize overall for the U.S., we expect 2007 to be a tale of two cities, with a poor first-half and a solid second-half.

I can assure you we know we can do better and we will. Remember the U.S. has generated on average operating profit growth of 2% and EBITDA growth of 3% for the past five years, and we are on track for a similar type of year in 2007. We will continue to have this as our cash flow foundation as we work aggressively to put in place multiple ways to better leverage our assets and consistently achieve our 5% target. We definitely believe the U.S. is an opportunity for Yum! Brands and we are in hot pursuit of it.

Emil Brolick, President of U.S. Brand Building, is leading this charge and like me, is confident you will see steady progress.

The good news is that our high returning growth engines, China and YRI, each had blockbuster first quarter performances. The great and most differentiated news from our company lies within these two high growth, high return businesses.

I came back from China this past week and I could tell you first hand, we are confident of another outstanding year in China in 2007. Importantly, it will be driven by our rapid and continued rapid and substantial development of multiple brands in mainland China. As of the latest count, we are now in 402 cities in mainland China with KFC, and over 60 cities with Pizza Hut casual dining. No other brands have this level of penetration and we do not see this picture changing anytime soon.

Of course, it is great for us as a restaurant company that the economy continues to grow 10% per year, because obviously more consumers can buy our food.

For KFC, we expect to add 300 new restaurants in mainland China, which will continue to widen our lead over our nearest competitor. We now have 1,000 more units than McDonald’s after having only a 100-unit advantage five years ago. Our brand majors and returns remain very strong and KFC will continue to strengthen its leading position in 2007.

This year, we are celebrating our 20th anniversary in China with KFC. Our team has a great plan for the year, with exciting new products, drinks and desserts, and we are very effectively aiming for the young adult market that now has money to spend.

For our 20th anniversary, we have targeted advertising which features what we are doing to enrich the life for our Chinese customers, in addition to all the new products that we are advertising this year. The advertising includes our First Light Foundation, which provides college scholarships to kids, the KFC 3-on-3 basketball tournament, which has grown in three short years to a significant, nationally televised event with over 180,000 players. We are also advertising our educational efforts on nutrition and balanced lifestyle, where we have distributed over 600 million nutritional leaflets and tray mats, because as you’ll recall, we offer a full line of vegetables and soups at KFC as well.

We are also advertising our KFC hostess program, who have become a key part of their local communities in various outreach activities, including on average hosting two birthday parties per day in every KFC.

KFC is a power brand any way you look at it, with cash on cash returns for our new units of just 18 months.

Now let’s turn to our Pizza Hut casual dining business. We are continuing to build on our leading position. We now have over 250 restaurants and growing rapidly. We are now moving into tier three cities, which provides further growth and is a great testament to the strength and reach of the brand. We expect to open as many as 70 new restaurants in 2007, which actually would make our Pizza Hut casual dining concept in mainland China one of the fastest growing casual dining concepts in the world.

For Pizza Hut home service, we will begin expansion in more cities to build scale after the successful test in Shanghai that we conducted in 2006. We expect to add about 20 new Pizza Hut home service units in 2007.

Finally, we expect to expand our East Dawning concept in Shanghai later this year to gain scale for TV testing.

We remain very focused against our number one strategy of building dominant brands in China in every significant category. We have a huge strategic advantage with our team in place in Shanghai, our own distribution system, and our development team, which is producing results that are unmatched by anyone in mainland China and perhaps the world.

We continue to expect that our China division will be our lead growth business, with 20% growth in operating profit.

Now on to YRI, Yum! Restaurants International. As I noted earlier, YRI is off to a great start in 2007, with profit growth of 25%. This is one of the best quarters that YRI has ever had. Importantly, the business ended 2006 on a strong note and continued the momentum into 2007.

The most important aspect to our high return YRI business and achieving its annual 10% profit growth target is the continued new unit development by our 750-plus franchisees in the many markets where we are category-leading players in QSR chicken with KFC and family or casual dining with Pizza Hut.

We opened 785 new restaurants last year, the seventh consecutive year we have opened at least 700 units, and expect to continue to build on that track record again this year with at least 750 new openings.

Importantly, we are off to a great start with 146 new openings in Q1, which is 20-plus more than last year’s Q1.

Our system sales growth results continue strong, with 10% growth on a local currency basis in the first quarter, with our single biggest challenge being the turnaround of our Pizza Hut U.K. business.

Our businesses are generally strong across the board. I just visited Japan, India, Dubai, and Jordan along with my trip to China. Pizza Hut has experienced unprecedented sales growth in Japan. In India, KFC's volumes look promising. Pizza Hut continues to have the most trusted brand while growing its sales. Our success in the Middle East is even more impressive. We are going to open 100 new units this year while the markets there continue to generate an average of 11% same-store sales growth for the past four years, and the KFC assets there are absolutely world-class.

To top it off, I had a lot of fun after I took my helicopter trip just to see what is going on in Dubai. It was amazing. If you want to go skiing, just go to their new mall there. You can get year-round skiing. But anyway, I had a lot of fun. We took a look at our flagship sites for our first Taco Bell test in Dubai and the team is very excited and we are going to have a great location and people are really pumped up about seeing how we do there.

We are in 113 countries with YRI and frankly, we have only one major issue, and that’s the Pizza Hut U.K. business, where we put in our management team and we’ll do the right things to turn that business around over time.

The key is that the YRI team has done a great job at enhancing our brand positioning around the world, improving the consistency of our advertising and developing great new product pipelines. As great new ideas are generated in various markets in the world, they are quickly adapted by their partners in the rest of YRI’s markets. Most important of all, we continue to have a great operational focus that targets to get better and better with the objective of being the number one brand in terms of consumer preference in all our markets.

I just recently attended our bi-annual YRI franchise convention in Sydney, Australia. I can tell you that I am really excited about how our YRI franchisees are very committed to our brands.

First, they are very focused on building our brands the right way. Second, we believe our YRI franchisees will continue to aggressively build new units looking for further expansion, and finally, our franchisees are demonstrating a strong desire and commitment to world-class assets with the KFC brand and the Pizza Hut enhanced dine-in concept that is so successful around the world.

To summarize, we are confident YRI will have another great year in 2007 with at least 10% operating profit growth. The new unit pipeline remains robust and sales trends for both our KFC and Pizza Hut brands are strong in many markets of the world, and our franchisees are committed to continued growth.

Now I will turn it over to Rick Carucci, our CFO, who will take you through the numbers in detail.

Richard T. Carucci

Thank you, David and good morning, everyone. I’m going to review three items today. First, Yum!'s first quarter results; second, our 2007 outlook and key trends; and third, a brief update of our refranchising program and our full-year cash flow expectations.

Let’s now review our first quarter results, which was a strong quarter for us given our U.S. performance. This is one of our best quarters ever in terms of combined growth from our two international business. Worldwide operating profit growth was 12%. Quarter one EPS was $0.70, up 19% versus last year. This performance gave us the confidence to increase our full year EPS forecast to at least 11% growth, or $3.23 per share.

Now let’s look at quarter one by business segment. Needless to say, our China division had a great quarter, with 31% profit growth. This growth was driven by strong new unit development and strong same-store sales growth in mainland China. Impressively, restaurant margin was up over one point versus a year ago.

You may note from our financials for the China division, for the quarter G&A increased 31%, which included five points of growth from foreign currency translation. This increase was primarily driven by continued growth in the business and the people needed for the development of our portfolio of brands. We expect that this level of year-over-year growth will moderate as the year progresses.

To recap, China division quarter one operating profit as up 31% or up 26% excluding the benefit of favorable currency.

Yum! Restaurant International, or YRI, also had a very strong first quarter with 25% operating profit growth. This operating performance was led by very strong sales results which exceeded our expectations. Our system sales grew by 10% in local currency terms, one of our best quarters ever.

There were two key factors driving this performance. First, our same-store sales growth for the system was plus 7%, with strength almost across the board in terms of markets. This is obviously a tremendous result.

Second, our year-over-year development rate of new restaurants was a very solid plus 4%. Our ongoing target is plus 3%, so we are quite satisfied with this pace. 94% of these quarter one openings were by franchisees, which reflects the strength of the YRI franchise community and the underlying solid economics of the business.

In addition, our new unit growth is broad-based in nature, with new unit openings the past year in over 40 countries with KFC and over 35 countries with Pizza Hut.

For quarter one, our restaurant margin improved by three-tenths of a percent. This is despite a one point reduction due to the inclusion of the Pizza Hut U.K. joint venture business. Our YRI team is working very hard to make progress in this area and we expect to see improvement for the full year.

As seen in last night’s release, the acquisition last October of the remaining 50% in our Pizza Hut U.K. joint venture business had a large and expected impact on YRI results. The primary measures impacted are franchise fees, company sales, and operating margin. The impact of the acquisition on these measures is reflected in the earnings release.

Our Pizza Hut U.K. business is one of the few markets with weak sales and profit results in quarter one. With the new leadership in place, we are expecting performance to improve as the year progresses and as David said, this is our single biggest YRI challenge.

To recap, overall YRI’s quarter one operating profit was up 25% on a reported basis, or up 23% when you exclude the favorable foreign currency benefit of $2 million.

Before we leave YRI, let me give you a quick breakdown of this 23% profit growth in local currency. Eight points of growth was generated by our franchise business. Eight points of growth was driven by our equity markets. Strength in the U.K. KFC business in Mexico more than offset the weakness in the Pizza Hut U.K. business during quarter one. Five points of growth came from our new growth markets, primarily our developing continental Europe KFC business, and finally two points of growth came from leveraging headquarter G&A.

Let’s turn now to the U.S. business performance for quarter one. Obviously we were disappointed. The 11% decline in operating profit was not surprising, given the weak U.S. sales and the magnitude of the adverse Taco Bell publicity. You should know that each of the brands is working very hard to improve performance levels and Taco Bell will also benefit as time passes.

There was a 6% decline in blended U.S. company same-store sales. Overall, it is important to note that same-store sales results for the U.S. systems, which includes our franchise results, performed better. System same-store sales declined 3% for the first quarter, lapping a very strong plus 5% last year.

The sales decline was the key driver of the U.S. restaurant margin decline of 1.7 percentage points. U.S. commodity costs for quarter one were slightly favorable, with favorability in meat, cheese, and produce costs offset by higher costs in wheat, flour and fish.

Team member wage rates increased in the 4% to 6% range, which contributed to the higher cost of labor percentage versus 2006.

One factor that added to the overall U.S. performance in quarter one was other income. We benefited from a small gain in 2007 due to the closeout of our Katrina insurance claims. We were also lapping an $8 million charge last year related to a new beverage contract. This swing had a positive year-over-year impact of 6% in U.S. operating profit.

Again, all of these factors combined led to an 11% decline in U.S. operating profit, lapping a 19% increase in quarter one of 2006.

Overall for Yum!, we continued to benefit from our substantial share repurchases with an additional 4% decline in diluted shares outstanding. Our tax rate was slightly lower than last year, which helped offset a slight increase in interest expense.

Finally, in quarter one, we had a $1 million gain from all of our refranchising transactions versus a $4 million loss a year ago. This added slightly to our year-over-year EPS growth.

Now let’s briefly review our 2007 outlook. First, let me reiterate our Yum! long-term growth model, which includes 20% operating growth from our China division, 10% operating profit growth from YRI, and 5% operating profit growth from our U.S. business. This adds up to 9% to 10% growth in annual operating profit.

The timing of the Taco Bell recovery will clearly impact our overall U.S. business performance. From a quarterly perspective, we believe Taco Bell bottomed out in quarter one. We expect to see improved sales results as we move forward. We expect to be positive in the second-half of the year.

As the year progresses, our U.S. comparisons ease substantially. To illustrate this, let’s review our 2006 quarter one and quarter four growth rates. In quarter one of 2006, U.S. company same-store sales growth was plus 4% and operating profit growth was 19%. In quarter four of 2006, U.S. same-store sales declined by 2% and operating profit was down 8% excluding the 53rd week.

At this point, our best estimate is that our U.S. operating profit for the year will be positive but below our 5% target process growth model.

In terms of quarterly trends, you should be aware of a few thoughts that we can provide. First, it is difficult to predict gains we may incur from refranchising transactions in advance. However, I can tell you that in quarter two just ahead, based on the number and the nature of the deals in the pipeline, we will not match last year’s gain of $15 million in quarter two. In fact, it is very likely we will only achieve a slight gain in quarter two. This will have negative 5% to 6% impact to quarter two EPS. This is purely a quarterly timing issue, so let me be clear; don’t get ahead of us on the second quarter.

Additionally in quarter two, there is an expense we incur at YRI every two years for our franchise convention. This will negatively impact our growth rate at YRI at quarter two by about four points.

Finally, in terms of the U.S., our expectation is that performance will improve some time in the second-half, with much more certainty during quarter four as Taco Bell laps the produce supplier issue late in the quarter, which includes $20 million in lost profit and incremental costs related to that incident. We have solid confidence that our plans in the U.S. will drive positive performance in quarter four.

From a corporate perspective, at this time we expect pretty steady share buy-backs throughout the year.

One final point; the tax rate could fluctuate fairly dramatically quarter to quarter.

For full year, the combination of the strong start at our China and YRI businesses, a rebound in the U.S. in the second-half of the year, and substantial share buy-backs gives us confidence to increase our full-year guidance up to 11% growth, or $3.23 per share. Our previous guidance was at least $3.21, or at least 10% growth.

Let’s now discuss refranchising and 2007 cash flow expectations. There is no change to our plans. Our U.S. target is to reach about 83% franchise ownership and 17% company ownership of the overall U.S. system by year-end 2008. This will be achieved primarily through refranchising activity at Pizza Hut, Long John Silver's, and KFC. Consistent with our earn-the-rights-to-own principles, we expect to see very little refranchising at Taco Bell, where our margins are very strong.

During 2007 and 2008, you should expect to see continued cash proceeds from U.S. refranchising, increases in U.S. franchise fees, positive impact to U.S. restaurant margin and operating margin, positive impact to Yum! ROIC, and less demand on capital expenditures from the U.S. business.

We believe we made good progress in 2006 with the refranchising of 452 U.S. restaurants, so we remain confident of reaching our target.

As always, we will do this the right way for our brand, our operators, our franchisees, and our customers.

On the YRI side for 2007, you should expect to see some pick up in new activity as the year progresses, as we begin refranchising some Pizza Hut U.K. restaurants. By the end of 2009, we plan to bring our effective ownership level back down to the range it was when the joint venture was in operation, or about 40% company operated. I can report that the process in the U.K. has begun and we are already actively pursuing transactions.

Importantly, you can continue to expect us to take a hard look at our global company ownership each year using our earn-the-rights-to-own principles as a guiding force.

For 2007, you should expect another year of a strong balance sheet and substantial levels of free cash available for payout to our shareholders. We expect to return $1.3 billion in cash in 2007, which is even more cash than the $1.1 billion returned in 2006. I will remind you that our quarterly dividend just doubled to $0.30 with our second quarter payments. This represents about a 2% yield and provides a more balanced payout to our shareholders. For the full year 2007, we continue to expect a 3% to 4% reduction in our share count due to share buy-backs.

To wrap up, we expect another successful operating year performance from our portfolio, generating consistent financial performance, impressive global growth, and strong global cash flow.

Back to you, David.

David C. Novak

Rick, I think you gave a very good summary, so why don’t we just go to the question and answers.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from David Palmer with UBS.

David Palmer - UBS

Congratulations on the quarter. Are you getting feedback when I speak here? Because I’m now getting feedback from you.

David C. Novak

No.

David Palmer - UBS

Okay, good. I guess what a lot of folks are keen to know now is with your debt leverage being where it is, one turn or a little over that of EBITDA, and seeing what folks are seeing here in the franchise world, that does seem rather low. Could you perhaps comment on the opportunity to take that up over time, if you might be taking that up more aggressively in the near-term than kind of a creep up with aggressive share repurchase.

Secondly, you have some callable debt. What is the plan there perhaps to refinance that? I assume you have that flexibility. Thanks very much.

Richard T. Carucci

Obviously we have a strong balance sheet which does give us flexibility. We generate a lot of free cash and our capital requirements have been pretty steady in the 600 to $7 million range. We are also continuing to increase our percentage of franchise ownership, which gives us less volatility on our cash flow.

What we said in December is that we plan to increase our debt over time with the growth of operating cash flow. Obviously our ratios are in great shape. We are still reviewing whether this is the right answer and we will probably have an answer later this year.

David Palmer - UBS

Okay, thanks very much.

Tim Jerzyk

Thanks, David. Next question, please.

Operator

Your next question comes from John Glass with CIBC.

John Glass - CIBC

Thanks. In the U.S., maybe to help isolate the pressures you are experiencing from Taco Bell, is there any way, like you did in the YRI business, to isolate the profit impact that Taco Bell had versus what the underlying system did, or the other two brands did?

In a related question, has this incident in Taco Bell spilled over into the multi-brand units? Are you see underperformance there as well?

Richard T. Carucci

The first part of that, we don’t disclose the breakdown by brand. Obviously with Taco Bell sales being down 11%, it had a disproportionate impact on the results. As a reminder, the Taco Bell impact in quarter four last year was $20 million.

Regarding the multi-branding piece of it, yes, it does have an impact, especially on the KFC/Taco Bell brands. We estimated that impact in quarter one was about 2% of same-store sales growth.

John Glass - CIBC

Great, thanks, and then just an unrelated, or moving to China, there has been some discussion in the press about minimum wage pressure there. Could you talk to what is going on? Do workers in your restaurants there make the minimum wage, or is the market rate substantially above right now the minimum wage there?

Richard T. Carucci

For others, the background for that question is that there was an erroneous press report that we were not paying our students the proper minimum wage. What happens is that -- first of all, we are abiding by all the laws that occur in mainland China. Effectively, the press report got it wrong.

We do pay minimum wage to certain employees. Students are actually not included under that minimum wage. We have a separate student wage, which we had gotten approved by the government, which the press was unaware of that. The subsequent investigation by the government showed we were in full compliance.

John Glass - CIBC

Thank you.

Operator

Your next question comes from John Ivankoe with J.P. Morgan.

John Ivankoe - J.P. Morgan

Thanks. Actually, all of my questions are on China. First, do you think there is an opportunity to ramp up company expansion beyond the current level in the out years?

David C. Novak

I think there is obviously an opportunity to ramp it up. I mean, if you just look at what’s going on right now. We are moving in to more and more cities successfully. We have both Pizza Hut and KFC with fantastic unit economies. Pizza Hut home service is definitely looking to be very positive and we are in the expansion mode there outside of Shanghai, and we are very hopeful on East Dawning. Rick and I just recently had all the food and we are making a lot of progress. It was fantastic food. The team is very excited about it and passionate about making it happen, so we think over time that is going to happen. We think we will ramp up the expansion over time.

I had an interesting discussion. You know, a lot of this is very qualitative, but I had discussion with Mark Cho who runs our KFC business. I asked him how many restaurants he thought we could build effectively right now just with our operating capability, and he said 550 no problem.

John Ivankoe - J.P. Morgan

Okay, I was going to ask that question.

David C. Novak

The reason why he feels that way is you if you go -- I was on a tour in China. I was in one zone I went to a small tier three city, or four city, and you walk in there and you see a great restaurant general manager and you see three assistants that basically can run any restaurant. So we have that kind of capability.

So I think our people capability is there. The big challenge we have is to find the right sites and we are doing that, but we expect to be able to ramp up over time.

John Ivankoe - J.P. Morgan

Okay, secondly I know that looking in that division, franchising has been relatively steady. When does that become a more important part of the China division, if ever in the near-term?

David C. Novak

I think in the near-term, it is not going to be that important. Frankly, we have the philosophy of earn the right to own. Basically, the kind of operations that we have in KFC are just outstanding. We have over 20% margins. We have cash on cash return for new units that are within 18 months. Our operational measures are among the best in the world, so we are kind of taking the major big box retailer approach of a target there. We can move faster by owning ourselves.

We are franchising and bringing in new franchisees, and we see Pizza Hut home service possibly as being much more of a franchise concept versus equity.

Right now, we are moving quickly with operational excellence and we have lots of leverage by owning.

John Ivankoe - J.P. Morgan

Okay, and --

Richard T. Carucci

Two further points to that; one is that economically, we feel it is in our best interest to develop restaurants and then franchise because the returns are what they are. A second thing to David’s point, we are building capability in franchising. We have been franchising for a while there and we are optimistic that as the economy continues to grow there, you have more, a larger and larger franchisee pool of people who have money.

So we think over time, we will be able to build our franchise side out.

John Ivankoe - J.P. Morgan

Very good, and the final question, again in the China division, I know Thailand and Taiwan have constraints in reported results in that division. In other words, mainland China is actually better than it looks. Is there an opportunity to refranchise any of those markets in the near-term?

Richard T. Carucci

We have no plans in the near-term on Taiwan or Thailand. It is something we will continue to look at over time. Again, to your point, we do concentrate -- we’re looking at the business at our mainland China results, although obviously we report it the way we do because that is how our management is structured.

David C. Novak

I think the other thing is no one gets a hall pass on our earn the right to own philosophy, so if we are not earning the right to own in Taiwan, Thailand, or you pick the country, we will get on it.

John Ivankoe - J.P. Morgan

Okay, very good, great quarter.

Tim Jerzyk

Thanks, John. Next question, please.

Operator

Your next question comes from Jeff Omohundro with Wachovia Bank.

Jeff Omohundro - Wachovia

Thanks. Just some more questions on Taco Bell. Regarding the weakness in the quarter, is it fair to say it was concentrated mostly in the Northeast, or was it much broader than that? And if so, maybe you could give us just some general waitings on that. That is my first question.

Richard T. Carucci

The weakness is actually throughout the nation but is worse in the Northeast, so roughly double the downside in the Northeast.

Jeff Omohundro - Wachovia

Regarding the upcoming marketing strategy behind the brand, could you just in general talk about how you might tweak it to respond to consumer concerns about Taco Bell and how you would address that?

Finally, does this have any impact on the timing of the breakfast rollout? Thanks.

David C. Novak

Basically, we are pretty much marketing the brand the way we have been marketing the brand because we have had a lot of success with that and we think that our advertising is good, our products are good, the value proposition is good. I think the big thing that we think we have to do is just give time time. We have to get through this and we will. We’ll get through it and we will start picking up in the second-half of the year. There is no reason to throw the baby out with the bathwater here.

We are just really patient with what we have here and we have 1,000% belief in the Taco Bell brand and that it will come back.

The other thing is that, regarding the breakfast launch where we -- we are basically in four markets right now. We have not delayed the timing and we are getting good learning and we are going to stay after it. I think we are steady as she goes and we expect improvement.

Jeff Omohundro - Wachovia

Thanks.

Tim Jerzyk

Thanks, Jeff. Next question, please.

Operator

Your next question comes from Glen Petraglia with Citigroup.

Glen Petraglia - Citigroup

Thanks. I have a quick follow-up on the Taco Bell comment, and then one other question. David, if you could comment on what your internal consumer research or consumer metrics are telling you as to how consumers are feeling about the Taco Bell business today, and maybe how that has changed over the course of the last couple of months?

David C. Novak

I think our Taco Bell brand, when we look at our monitors, we look at our value ratings in quality and the overall big things that we look at. We really have not seen a significant change. Obviously when you have a major event, your image ratings will take a dip over the short-term and work their way back, so we are basically seeing what we typically would expect to see.

That is why I think the big thing we have to do is just take some time. We have a very loyal user base. One of the big advantages we have at Taco Bell, remember, is we have a 70% share of the category with no national competitor, so when people want to have quick service fast food at a good value, we are there.

But obviously there are a lot of places you can eat, so when people, when we have an issue, people will have a tendency to go other places until time takes care of it.

So that’s why we usually say when you have food safety issues, you are usually dealing with about six months and that is kind of where we are seeing it. We actually were bouncing back faster at Taco Bell than we have in other situations because of the strength of the brand, until we had the other issue that hit after e-coli.

We are just going to see how it all plays out, but we are totally confident that we have not had any long-term damage and that we are going to be able to build the brand over time like we though.

Glen Petraglia - Citigroup

Okay, and then in terms of Pizza Hut in the U.S., you made a comment and I think it was also mentioned at the analyst day back in December, that you are targeting or your goal is to move away from local discounting. Correct me if I’m wrong, but the pizza category tends to be one that is very deal-driven. So I’m curious to know what gives you the confidence that you will be successful in moving away from that sort of, kind of shifting the way the industry had structured.

David C. Novak

I think first of all, we will continue to be value competitive, but there is a difference between being value competitive and value lucrative. We think we have done some pretty silly discounting and we are trying to get rid of that. We don’t think it is going to impact our overall value impression.

Plus we are testing some approaches that we think will give more of an enduring value proposition over time.

One thing about the pizza category is that it is very competitive and we really cannot go through all the things we are testing in that arena because if you look at what is going on in the category right now, I think Domino’s is advertising our Big New Yorker right now on national television. Everything that we have done in the last ten years, they’ve been doing for the last three, so we are not going to tell them what we are working on right now.

Glen Petraglia - Citigroup

Thanks.

Tim Jerzyk

Thanks. Next question, please.

Operator

Your next question comes from Rachael Rothman with Merrill Lynch.

Rachael Rothman - Merrill Lynch

Good morning. Can you talk a little bit about maybe how the weakness in the U.S. business outside of Taco Bell is impacting or is not impacting the multiples that you guys are receiving on the refranchised units, and potentially if that is having any impact on the franchisees’ desire to undertake the remodel program?

Richard T. Carucci

Regarding first the refranchising, it really has not impacted our refranchising program. That is based on marketing individual units and we are pretty confident that it is going to have very little impact on that side of it.

Regarding the remodeling efforts, quite a fair bit of that, most of that is contractual and so people have to continue to do the remodel. For KFC, the system is scheduled to be remodeled by June, 2008 and we expect that pace to continue.

David C. Novak

The other reason why I don’t think it is really affecting the multiples is that the franchisees recognize that we have underleveraged assets. They see the value and that is a big plus.

Rachael Rothman - Merrill Lynch

Great, and just as a quick follow-up, on the brands outside of Taco Bell and KFC and Pizza Hut, can you talk maybe a little bit about what’s giving you such conviction in this stronger back-half, other than easing compares? It is a reinvigoration of those product pipelines or new advertising or -- what are you guys focused on to drive actual growth in sales rather than just a rebound from the easing comps? Thanks.

David C. Novak

Well, I think that we have a good pipeline of product news. We have good advertising and we continue to make steady progress -- not quantum leap progress but steady progress in our operations. It is sort of the blocking and tackling of the business that we know how to do.

We feel good about our calendars and the environment and we expect to see better performance.

Rachael Rothman - Merrill Lynch

Thank you very much.

Tim Jerzyk

Thanks, Rachael. Next question, please.

Operator

Your next question comes from Joe Buckley with Bear Stearns.

Joe Buckley - Bear Stearns

Thank you. First couple of questions -- what are you thinking in terms of food cost inflation for the U.S.?

Richard T. Carucci

We have not changed our full-year forecast yet, Joe, of 2% or 3% for the full year.

Joe Buckley - Bear Stearns

And then a question on the G&A, the corporate level G&A was down year over year in the first quarter. Anything unusual there or should we expect to see that G&A number down on the corporate side?

Richard T. Carucci

What happened is last year we had taken some legal reserves that we did not have to overlap this year, so it is basically overcoming a negative number from last year that gave us the upside.

Joe Buckley - Bear Stearns

Okay, and then you laid out the year-over-year comparisons in the quarters for the U.S. business. Could you walk us through YRI and China? The same-store sales numbers in the first quarter for both were very, very strong. Just as the year progresses, do those comparisons get a lot tougher for both of those? Just kind of lay out expectations a little bit, if you can.

Richard T. Carucci

We’ll probably just repeat what we said before, Joe, which is we said at the beginning of the year that we expected YRI to have harder overlaps in the second-half of the year and pretty favorable overlaps in the first-half of the year. Really, a lot of that was driven by the U.K. performance from the previous year. I would say nothing really new from that front.

China, when the year started we expected to be fairly steady quarter to quarter from last year. Now obviously we don’t expect to have the type of quarter we just had every quarter, but there is nothing out there that was unusual in terms of the overlaps for China last year.

Joe Buckley - Bear Stearns

Okay, and then just the U.S. sales question, two U.S. sales questions; the Taco Bell down 11% number you shared I believe is a company number. Could you share what the Taco Bell system wide same-store sales numbers were? And then, last call you did share with us the KFC and Pizza Hut numbers. Could you do that again?

Richard T. Carucci

On the system wide, relative to Taco Bell, Joe, we are only providing the U.S. blended number, which was 3% decline versus the company, which was 6% decline. Basically, each of the brands in the U.S. franchise systems performed anywhere from 2 to 4 points better than the company side, so it was across all three brands.

Our policy going, as we established it last quarter, was not to disclose individual brand performance in the U.S. unless there was an out layer of performance, which was a significant driver to the overall business in the U.S. That is the case in this quarter and that is why we disclosed individually the Taco Bell company same-store sales number for the first quarter.

Joe Buckley - Bear Stearns

So we are only going to get those numbers if they are really good or really bad?

Richard T. Carucci

That would be correct.

Joe Buckley - Bear Stearns

What do you consider a normalized range of same-store sales? Actually better than down 5?

Richard T. Carucci

No comment.

Joe Buckley - Bear Stearns

It’s a big part of the business you keep missing the -- that’s it for me. Thanks.

David C. Novak

I think there is a reason why we are doing this. We are not your ordinary restaurant company. We have been working for years to get value for being not your ordinary restaurant company.

We have China. We have YRI, and we have a U.S. business, and it’s a portfolio. The real major for us in the U.S., and just look at our cash flow, we have averaged 3% growth the last five years in cash flow, 2% in profit. We have a real steady base there and we have a portfolio and that blended number is really the most salient number for people who look at it.

If there is an out layer, particularly on the downside, I think, we are not going to hide any salami. We are going to tell you exactly where it’s at and what the issue is here.

But we want to get value for what we are, and it is not your ordinary restaurant company. We have a global business that nobody else has with China and YRI, and we have a U.S. business that nobody else has either.

We have 20,000 restaurants in the United States we think that are under-leveraged, that have only been growing at a 2% rate and we are not happy about that, okay? So we are going to get all over that like you would expect us to, but that is why we are doing it.

We are not trying -- it’s not funny, okay? We’re sitting here, we’re laughing but we are very serious about presenting our business the way it really is. Those three things I think make us very different -- China, YRI, portfolio of U.S. businesses, and then add in a fourth is cash flow. You look at our cash flow position and what we are paying back to the shareholders, there aren’t too many restaurant companies that are doing that.

That is why we are communicating what we are communicating. It is not to be cute. We are very transparent. I think we have a very good record for being that way. If we ever have a problem, we will be the first to tell you that.

I just want to say that, because I don’t want to give any sort of glib feeling about this. We are doing this all for a reason.

Tim Jerzyk

Next question, please.

Operator

Your next question comes from Mark Wiltamuth with Morgan Stanley.

Mark Wiltamuth - Morgan Stanley

Good morning. I would like to ask a little bit on the U.K. Pizza Hut business. If you could expand a little bit more on the challenges there. Are you just facing margin issues? Are the comps weak? Is refranchising really all it’s going to take to address the issues, or are there broader things you are doing on the menu?

David C. Novak

I think we are definitely facing margin issues and we are definitely facing comp issues, and I think the reason is that we just really did not manage that business well the last three years. That is why we acquired it. We had a joint venture partner we worked with for a number of years that frankly, we were not making as much progress as we needed to make, so we are in a major turnaround mode. So we are really trying to improve our ops and improve our assets, improve our overall marketing, which has been all over the map and we are just in the process of turning that business around.

We have huge interest in our refranchising, and I basically advised the team let’s go after that but let’s do it the right way. Let’s get the best people. There’s no -- we don’t have to -- we are not trying to win a race here. We want to build this business the right way so we have a real quality business and that’s what we’re trying to do -- turn the business around the right way and in a sustainable way.

Right now, I would say we have issues about everywhere you would not want to have issues, with one big plus is there is huge demand for our stores.

Mark Wiltamuth - Morgan Stanley

And the U.K. in total is like a quarter of your profits there in YRI, and you still had a record increase in earnings, so what would the YRI number have been if you hadn’t had the U.K. drag?

Richard T. Carucci

That is something we don’t provide. I think we’ve basically been pretty open in the fact that Pizza Hut U.K. business has been down the last couple of quarters, but the other side of that though is that the KFC U.K. business is doing extremely well.

In terms of profit impact to YRI, do take a look at the earnings release. The last part of the YRI section where we give you what basically the change would be for the first quarter year over year with and without that JV.

Mark Wiltamuth - Morgan Stanley

Okay, and just one small question on East Dawning; did you say you were getting ready to do TV? I think you only have a handful of stores there. I was just curious what your thoughts are on the East Dawning development.

David C. Novak

By the end of the year or the first of next year, we expect to have enough stores there where we can advertise it.

Richard T. Carucci

There’s regional television, so you can buy TV just in Shanghai.

Mark Wiltamuth - Morgan Stanley

Thank you.

Tim Jerzyk

Thanks, Mark. Next question, please.

Operator

Your next question comes from Andrew Barish with Banc of America.

Andrew Barish - Banc of America

A quick follow-up on the U.K. and the KFC success there. Does that provide you a little bit of a template for the Pizza Hut turn in any way? Has the market in the U.K. just gotten a lot better? We have seen good numbers out of McDonald’s and Burger King there as well, so maybe some commentary on the broader quick service market in the U.K., if you could.

Richard T. Carucci

Just a couple of things. First of all, both KFC and Pizza Hut, I think we are proud of our history on both brands over time there. Both brands have performed well if you look at it over a number of years.

What we have right now, your point is the U.K. industry is getting better overall, but what we are doing right now is we are under-performing that industry on Pizza Hut and way over-performing against that industry on KFC. So KFC has been flying. We have had tremendous results there at the same time that we have struggled with Pizza Hut.

In terms of the way back, there are certain fundamentals in the business that are similar in terms of taking care of customers, product innovation, et cetera. But the execution of that will be quite different on the Pizza Hut side versus KFC, especially we have to really improve our service levels on our dine-in business. I think the team is getting on top of that.

Tim Jerzyk

Thanks. Next question, please.

Operator

Your next question comes from Steven Kron with Goldman Sachs.

Steven Kron - Goldman Sachs

Good morning. A few questions back on the U.S. First, on the pizza category and Pizza Hut, it seems to be that over the last few months, the television spot advertising may be a bit more aggressive than it has been in the past, using competitor names and logos and stuff. I am wondering, is there a change in your advertising tact here and is this a lever you are looking to pull to perhaps combat some of the discounting stuff that you are trying to move away from?

David C. Novak

Last year we did a lot of testing, concept testing, positioning testing, to try to get at what really made us unique, and the fact of the matter is there is a very powerful positioning that we are at the early stages of beginning to execute, which is America’s favorite, always gives you more. So if you watch the advertising, it says want more? Get America’s favorite. So we are going to continually keep giving consumers a rationale of what we give that the other people don’t give.

Now, whether we mention direct competitors or not over the long term I think is up in the air, but our pan pizza is America’s favorite because it tastes better than Papa John’s and Dominos. Our new improved hand-tossed pizza is America’s favorite because it now tastes better than our two major national competitors.

So we have tested these things. We do a lot of things that we have not been getting enough credit for at Pizza Hut, so we are in the midst of really trying to do a much better job of that. I think it will ultimately pay off for us over time.

We know when we put real meats on the bones of America’s favorite gives you more, we get a lot of credit for it with the consumers, and all of our ratings go up and we feel like we have a great position. We just have to execute that over time.

The more aspect of this is sort of like our conscience. Everything that we do we want to demonstrate that we are giving the consumer more.

Steven Kron - Goldman Sachs

And then on the KFC business, David, you referenced pulling the lever of late night a little bit more. Can you maybe frame that for us, if you indexed KFC versus some of the industry peers? Maybe quantify how many hours you guys were under-indexed from an extended hour standpoint?

David C. Novak

We are not even on the map. We close before night time begins, so I’m saying that to the entire system. We think this is a significant opportunity. We tested this in New York. We have a specific menu that allows us to do it in a way that we can offer late night products that help us deal with some of the product issues in terms of availability and we are going to expand it on a DMA by DMA basis.

I think one of the things that Emil did when he was at Taco Bell was they had a very strong market-by-market focus and we are going to try to do things on a scale basis with all of our brands when we test things, so we do things well in every market that we have tested or expanded.

So we will be moving across the country with late night and hopefully stay open later and later and later.

Steven Kron - Goldman Sachs

Lastly within the multi-branding, Pizza Hut/WingStreet is the big vehicle of growth there. Could you give us a sense for how the units that are in the comp base from the Pizza Hut/WingStreet are doing year over year?

Richard T. Carucci

The good news is -- well, there’s two different businesses. We should think of it separately on dine-in versus delivery. We have been at the delivery side for a while. We are pretty confident it adds a decent layer of sales to our business, and we are getting franchisees to do it. So we have been doing it for four years on delivery.

What’s exciting to us and more new is the dine-in side of the business. We don’t have a lot of restaurants yet converted there, but the thing that’s been impressive is two things. First of all, we had a huge growth rate when we put in the new menu and upgraded the asset, but the second thing that’s encouraging, for those units that have been open more than a year is we are getting positive comps the second year and we have not gotten that on previous dine-in initiatives. So it is still early days, but we are gaining confidence as that time goes on that we may have something here.

David C. Novak

We already have over 1,000 delivery carry-out units and we have rolled it out on a market-by-market basis. Now we are working with our franchisees to get scale across the board, so we are very confident that we have a winning concept. Now the real challenge that we have is scale it so that we can get the marketing power behind it and get more differentiation in the marketplace. That is the real challenge and that is what we are working with our franchisees on and more and more of them are testing the restaurant-based WingStreet option and getting excellent results. We think that is going to help us upgrade the system the right way.

As you know, contractually the Pizza Hut franchisees need to improve their assets over the next few years, and so we basically have an economic proposition that is much better with WingStreet than just going in with the basic Pizza Hut. I think that proposition will help us upgrade the system with more scale and hopefully better unit economics.

I think that is going to take a little time to because the franchisees are getting into it and they are getting more and more learning on it, and you get more and more good, positive stories, that’s how things work in our business.

So the press is really good on the WingStreet restaurant-based units and we think that will pay off.

Steven Kron - Goldman Sachs

Thanks.

Tim Jerzyk

Thanks, Steven. Next question, please.

Operator

You have a follow-up question from David Palmer with UBS.

David Palmer - UBS

I think the street was surprised by both the strength internationally and the weakness in the U.S. Where were you surprised internationally by areas of strength? What do you think in particular was driving that strength where you saw it? Was it a macro economic conditions or something else? Could you give us some more detail, please?

David C. Novak

I have a hard time guessing what the street is really thinking of. Some of the stuff I have read, the people were surprised the U.S. business performance was as good as it was since we had the two incidents that we had.

But what’s going on -- China, you have 10% economic growth, 11% economic growth, you have a great competitive position and all the things that we’ve been talking about. The economies are good outside the United States and there is a lot of optimism and things are moving in the right direction everywhere you go. Even in Japan. I told you I just got back from Japan. Things are looking up a bit.

So the macros I think are good outside the United States. The U.S. business is affected by a little bit tougher situation, but it is nothing that we can’t handle over time with the right kind of marketing and operations.

Richard T. Carucci

David, from my perspective, the thing that I was a little surprised at was the depth and magnitude of the international same-store sales growth. We obviously knew about the development piece because that has stuff we -- it’s in the ground, so you know about it. But the size and the breadth of the same-store sales was higher than what I expected going into the quarter.

David Palmer - UBS

Does that feel macro to you, Rick? I guess that’s the only explanation, that there was generally better consumer strength broadly internationally?

Richard T. Carucci

I think that is clearly helping. We had a very strong fourth quarter back-half of the year as well on YRI. Really, all of 2006, the number of countries that were strong was higher than let’s say previous years, the percentage of countries where we had same-store sales growth.

I do think the economy is helping. I also think our competitive position improving over time is a factor as well. We have been adding a lot more units outside the U.S. than everybody else, and that improves your market position, gives you better people capability, better marketing strength, et cetera. So I think it is a combination of our competitive position, our initiatives, and the economy.

David C. Novak

The other thing I think really works for our favor internationally is the best practice sharing that we do. When we have one thing that works in one market, it is spreading and it spreads quickly and we can actually implement it faster because you don’t have as much scale in a lot of these markets, so it is easier to implement something in a 200-store market than it is in a 5,000-store market.

The other thing I think is really exciting about our international business is things that we do, whether it’s the United States or Canada or even in the big major markets where we have more restaurants, when we roll them out, they work a lot better because you do not have as much competition. That is a big advantage.

In the United States, you have 30 major chains out there fighting it out everyday. When we go abroad in most countries, the real big magilla there is McDonald’s and maybe a Burger King in some places, or -- it is just not as competitive. I think that is a big advantage.

So the things that work in one market work bigger on the international scene.

The other thing that I think that we are really trying to do is we do have processes and discipline in the marketing function that are better than we have had before. I think the better we execute, the better the performance.

Believe me, we’ve got a lot of work to do to keep this momentum going.

David Palmer - UBS

Could I ask one more question, and that is about the spread between your company restaurants and the franchise units in the quarter? I was somewhat surprised by that, given the higher percentage of franchise Taco Bells in the Northeast. I was thinking that would actually cause it to be the reverse there. So maybe the spread was more a function of Pizza Hut and KFC, my theory being that the company stores in those two brands are more in the major metro markets and are more subject to competitive switching? What is the reason do you think for that gap?

Richard T. Carucci

As I mentioned earlier, the franchise performance by brand in the U.S. was 2 to 4 points better. It was every brand, including Taco Bell.

David Palmer - UBS

Why? Why do you think? There are those urban versus rural markets type of stuff going on, which does dovetail with the competitive pressure and the proximity of competitors. Do you think there was that?

David C. Novak

That is probably our best guess. It is not surprising to see franchise stores running ahead of company. They have lower sales bases in some cases, so they have -- when you are busy, you have less topping out at certain time periods. They can handle the peaks better.

So we’ve seen that for a period of time. The magnitude of it was a little higher than normal and probably your theory on the rural/metro is our best at this point. Obviously something we are going to keep an eye on as we go forward.

Tim Jerzyk

Thanks, David. Next question, please.

Operator

Your next question comes from Larry Miller with RBC Capital Markets.

Larry Miller - RBC Capital Markets

I was waiting to hear a little bit in more detail about why ex Whitbread, the YRI profits were up 360 to 370 basis points. Rick, can you give us a little more color on what the margin lines look like? You gave us some total margin lines. And why again that would not continue throughout the year?

Richard T. Carucci

Just to back up, we said that our total -- we did talk a little bit about total restaurant margin, that it had a negative one point impact on the YRI results. YRI including that was up three-tenths of a percent, so the rest of the market was up.

Its impact on operating margin was about 3.6%, which was in the release, and that’s what drove the overall operating margin decline for YRI of 2.7%. So without that, operating margin would have improved, which you would have expected given our sales results, and if the rest of the business has more franchise growth and slight refranchising, so the combination of the -- if you take out the U.K. business, the operating margin is being driven by a higher mix of franchise business as well as obviously great overall results.

David C. Novak

That impact from the Pizza Hut U.K. acquisition will continue through the third quarter. We acquired the business in October, so that change in the business, effectively you are reflecting the G&A of that joint venture in our P&L, so that is the big driver of the operating margin change, and then the restaurant margin impact should continue the rest of the year as well.

Larry Miller - RBC Capital Markets

Okay, so higher G&A throughout the year, higher revenues as well.

David C. Novak

Yes.

Larry Miller - RBC Capital Markets

Thanks very much.

Tim Jerzyk

Thank you, Larry. Next question, please.

Operator

You have no further questions at this time.

David C. Novak

Let me wrap it up then. We had a very good quarter and we are pleased to report that on the strength of the global growth, that we have raised our full-year EPS forecast to at least 11% growth, or $3.23 per share, up from 10%. We will continue to build on our track record of consistency this year.

Second, you can expect global growth to continue with 1500 new stores opening around the world, and third, each of our businesses will generate free cash flow, giving us global capability to return $1.3 billion to shareholders, allowing us to reduce our shareholder count again and do it in a significant fashion and we will pay an above market dividend of approximately a 2% yield.

I think we are off to a good start and a lot of work to do. I can assure you we are going to stay after it. Thank you very much for the call.

Operator

This concludes today’s conference call. You may now disconnect.

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