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Executives

Tim Jerzyk - Senior Vice President, Investor Relations/Treasurer

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

Richard T. Carucci - Chief Financial Officer

Analysts

Ashley Woodruff - Friedman Billings Ramsay

Rob Wilson - Tiburon Research

Steven Kron - Goldman Sachs

David Palmer - UBS

Jeffrey Bernstein - Lehman Brothers

Rachael Rothman - Merrill Lynch

Glen Petraglia - Citigroup

John Glass - CIBC

Jason West - Deutsche Bank

John Ivankoe – JP Morgan

Jeff Omohundro - Wachovia Securities

Mark Wiltamuth - Morgan Stanley

Eli Lapp - Morgan Stanley

Joe Fischer - Bear Stearns

Presentation

Yum! Brands, Inc. (YUM) F3Q07 Earnings Call October 9, 2007 9:15 AM ET

Operator

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

Tim Jerzyk

Thanks, Jennifer. Good morning, everyone and thanks for joining us on the call. 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.

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 the Safe Harbor statement included in our earnings release last night 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 remarks from both, we will take your questions. Now I would like to turn the call over to David Novak.

David Novak

Thank you, Tim and good morning, everybody. I am pleased to report that we had an exceptional third quarter, with 16% growth in operating profit and 20% EPS growth, demonstrating once again the ability of our global portfolio to consistently generate growth.

Once again, our Mainland China and YRI businesses led the way in the Yum! portfolio. With such strong results, I am also very happy to report that we are increasing our full year EPS outlook to 13% growth from 12% previously. Importantly, for the fourth quarter, we expect to see continuing solid profit growth in the range of 8% to 10%, including much improved performance from our U.S. business.

Now let’s review the third quarter. In Mainland China, we grew system sales by a very strong 26% in local currency terms and are on our way to another year of opening at least 375 new restaurants, further distancing ourselves from the competition for both KFC and Pizza Hut.

Overall, we expect to see record new units opening from our China division in 2007. The health of our Mainland China business is strong, has very good momentum, and is coping well with short-term spikes in food inflation.

I would like to thank all of you who made it to the investor conference we held in Beijing last month. Believing is really seeing the power of our Chinese operations and the love our customers have for our brands.

At Yum! Restaurants International, we grew system same-store sales 7% with outstanding quarterly system sales growth of 11% in local currency terms, and we are headed towards another year of new unit development that leads the industry. In fact, we not only expect 2007 to be the eighth straight year that the YRI division has added 700 or more new units, but we also believe that this will be a record year for YRI in new unit openings, breaking the previous record set in 2003 by opening over 850 new restaurants.

No other global business has matched the unit opening volume of YRI and the annual consistency. YRI has become a broad-based development machine. Think about it; for 2007, we expect to open 150 new units in our Asia franchise markets, 80 units in the Middle East, 60 units in Europe, 40 units in Russia, and so on.

Importantly, for the third quarter, our U.S. business improved versus the first half of this year. In fact, both our system same-store sales and operating profit growth turned positive this quarter. Now, we are not yet where we need to be but we are seeing signs of progress across each brand and obviously expect Taco Bell to have better results in the fourth quarter.

Now let’s review what we see at each of our businesses and talk about our plans and trends. In the China division, specifically Mainland China, our KFC and Pizza Hut brands that created western QSR and casual dining categories in that market, continued to generate exceptional results, driving Mainland China system same-store sales growth of 11% and Mainland China operating profit growth of 29%. This result was achieved in spite of a challenging commodity cost environment in Mainland China that we highlighted during last quarter’s conference call.

As of the third quarter, KFC has nearly 2,000 restaurants across 420 cities and growing. In fact, we fully expect KFC in Mainland China will end this year with more than 2,100 restaurants.

With consumer reach and awareness at all-time highs and extremely attractive unit economics, there is plenty of room to drive brand awareness even deeper into the consumer base and build upon our leadership position with the QSR category in that market.

Our 20 year anniversary marketing efforts have only reinforced our strong ties to the Chinese customers. I hope you can see that we are not resting on our success thus far but we are very focused on continuing to expand KFC as a powerful brand that is very much a part of the Chinese culture.

Now on to the other category innovator; we now have almost 300 Pizza Hut casual dining restaurants in Mainland China, the undisputed leader in the category, and we grew units by 31% versus last year during the third quarter. We are now in over 60 cities. With strong unit economics, we were able to open restaurants in lower tier cities where there is no western competitor in sight and we don’t expect to see them any time soon.

Our biggest consumer issue is the length of wait time during dinner. The good news is that it simply means more growth opportunities. We are also leveraging our assets with the expansion of tea time, where our table service gives us a strong advantage versus Starbucks as we serve coffee, tea, fruit drinks, and afternoon snacks.

Now let me give an update on where we are with our delivery business, Pizza Hut home service, which we started about three years ago and we already have 43 Pizza Hut home service restaurants in six cities, and we’ll be going into more cities with even more units. We are looking to bring game-changing innovation to the delivery category, just as we have done with our two established brands.

In fact, we recently added our second call center and a [go-to-go] commissary to handle the expected expansion of this business. We are doing everything we can to capitalize on the convenience and affordability of the delivery occasion, which will become more and more important as that economy continues to grow.

Finally, we continue to expand East Dawning, the Chinese quick service restaurant brand that we created. We now have eight restaurants in the Shanghai market. In fact, we will be airing our first East Dawning advertising soon. The commercial is ready to go. We will be testing TV in Shanghai to build brand awareness and differentiate ourselves from the local competitors.

We still have much to do on both the sales and margin fronts but we are feeling more and more confident each day that East Dawning will be successful.

To summarize, our China business had a great third quarter with reported operating profit growth of 28%, even in spite of a challenging commodity cost environment. That is outstanding performance by any measure. As we will talk about later, we do have at least a short-term issue with commodities, but our long-term opportunity remains unparalleled in the retail space.

We believe that with the combination of the tremendous business we have created and the growth prospects for the Mainland China market, this will enable us some day to have more than 20,000 Yum! restaurants in Mainland China. Believe me, this number is more than realistic when you consider Mainland China has over 1.3 billion people, with growing wealth and significant personal savings, while McDonald’s has 14,000 restaurants serving only 300 million consumers in the U.S. and, as you can clearly see, we have the opportunity.

Now on to our Yum! Restaurants International division, or YRI. We are very pleased to see another very strong quarterly performance from our YRI portfolio. For the third quarter, we achieved 11% growth in system sales, local currency basis, well ahead of our ongoing target of at least 5% growth. In fact, the growth continues to be broad-based across our 113 markets.

For example, our Middle East franchise business unit drove third quarter system sales growth of 24%; South Africa was up 27%; our Caribbean Latin American business was up 12%; and in Asia, our sales increased 12%.

One of the contributing factors to this strong system sales growth is the number of new restaurants that we are adding. YRI opened up 193 new restaurants in the third quarter and virtually all of our 515 new restaurant openings year-to-date, or 92% of them, were by our franchise partners.

We are on track to add more than 850 new KFC and Pizza Hut restaurants in 2007. With such strong unit expansion and same-store sales growth across our franchise markets, franchise fees grew by 9% in local currency terms.

Now let’s talk a bit about some of the key emerging markets. We are seeing excellent results from our Russia business as we convert the Rostik Restaurants to co-branded Rostik-KFC units. In fact, the mix of the KFC menu items in these converted units is over 80%, a testament to the global appeal of our KFC brand.

We are also continuing to invest in our India business and build upon the success of our recent KFC advertising test.

As for KFC in France, we continue to see record average unit volumes with our 52 restaurants and great results from our new units. We believe that our investments and patience are starting to pay off and there is no doubt that we are well on our way to building great businesses in these markets. We are confident these markets will be key contributors to YRI’s growth in a few years.

One of YRI’s recent challenges has been Pizza Hut U.K. We are pleased to report that we are starting to see progress in the United Kingdom. In fact, we achieved third quarter same-store sales growth of 8%, driven by the successful launch of Cheesy Bites Fondue. We are making progress, although it is a little early to call it a victory. However, as I’ve said before, given the process and discipline that the new team is implementing, we are confident that we are moving towards more consistent performance.

Just like our Mainland China business, YRI still has a very long runway for unit and profit growth. This is an important aspect of the YRI business. As a point of reference, we have over 20,000 restaurants in the U.S. serving 300 million consumers, while our YRI business has only 12,000 restaurants serving 4 billion consumers.

In addition, we intend to extend that long runway of YRI growth by developing the Taco Bell brand into a third global brand. In fact, we just recently opened our first test unit in Mexico and ground work is being laid for the Middle East, India, Spain, and Japan.

Now on to the United States businesses. Our U.S. business improved versus the first half of this year, as third quarter system same-store sales and operating profit were both up 1%. At Taco Bell, frankly our recovery is taking a little longer than expected. As we noted in the release last night, we do expect Taco Bell performance will improve in the fourth quarter.

The good news is that for the vast majority of the past three weeks, our franchisees have experienced slightly positive same-store sales growth. Part of this we believe is due to the Cheesy Beefy Melt, a great product at a great value price of $1.99. It is actually mixing at a level which is second only to the highly successful Crunchwrap as a new product.

In addition to the upcoming soft overlap, we have some very good product news that is just ahead, as well as some good tactical plans to excite our customers. Keep in mind the World Series is just ahead and Taco Bell is a Major League Baseball sponsor. Importantly, we believe the team is setting up well for next year on a number of fronts and the recent positive momentum is a very good sign.

Looking ahead to 2008, we have a strong pipeline of new and different ideas for this category-leading brand. Make no mistake about it. Obviously, I’m tasking myself and the team for much better results at Taco Bell going forward.

Now on to KFC. Overall, this will be a slightly positive year for the KFC system with the franchisees performing better than company stores. We have been looking at some significant long-term and sustainable growth opportunities for KFC in the U.S. This includes actively testing for growth opportunities in the area of value, more nutritionally balanced options, on-the-go, and the lunch occasion, where we believe we are under-represented.

Importantly, on the asset front, we are pleased to report that the KFC U.S. system is on track to complete all targeted asset upgrades by the middle of next year. We will have a much more up-to-date KFC U.S. asset base very shortly.

Finally, given the confidence in the leadership of the KFC management team, the franchisees agreed to increase their national television advertising spending by half-a-point beginning in 2008, which will give us a much more complete national calendar. This only happens when the franchisees have credibility in the direction the company is taking.

At Pizza Hut, the successful relaunch of Pizone and local marketing initiatives during the third quarter delivered category-beating results. Looking longer term, as the category leader with the proven track record of pizza innovations, the Pizza Hut team believes we can deliver more consistent positive results through a combination of building differentiated sales layers, like our highly successful Wing Street option.

In 2007, we have tested and developed a new value layer and other meal options to go along with Wing Street. Pizza Hut franchisees also agreed to increase their national television advertising spend by three-quarters of a point to introduce these as permanent sales layers, starting in 2008. This really shows the confidence that our franchise partners have in what we intend to accomplish with this great brand.

I feel better about the direction and vision for the Pizza Hut brand than I have in years.

For the U.S. overall, we will be ending 2007 with improving momentum and entering 2008 with solid plans. Full year U.S. operating profit is likely to be even with last year. We expect to do a lot better next year, given that this year’s operating profit is expected to be flat.

Finally, in addition to building sales layers and bringing more relevant and exciting product news to our U.S. consumers, we are also focused on ensuring that our company restaurants are earning their right to own, reducing our U.S. company ownership down from 26% in the beginning of 2006 to 17% by the end of 2008, which will improve our returns from this business and put our U.S. restaurants in the hands of good operators.

To summarize, the power of our global portfolio of leading restaurant brands continues to generate consistent EPS growth and significant free cash from our businesses. This year we will generate a record $1.4 billion in cash from operating activities, while investing in the growth of our businesses and maintaining our brand assets around the world.

With the strength of our global portfolio that continues to generate growth and a balance sheet that is stronger than ever, I am pleased to report that yesterday our board approved a significant increase in share repurchase authorization from our normal $500 million to a new $1.25 billion authorization. This authorization is part of the company’s two-year plan to buy back up to $4 billion of our shares, reducing our share count further by as much as 20%, adding to the 12% reduction we have achieved during the past three years. This showcases our financial strength when you consider that we are doing this in a year in which we already doubled our quarterly dividend.

We expect to finance part of this two-year share repurchase plan through an increased level of debt, and we believe that the combination of our track record of consistent growth with high returns and strong free cash flow will enable us to remain an investment grade company, even with increased leverage.

Finally, as we look forward into 2008, we expect to continue to build on our track record of consistently delivering against our target of at least 10% EPS growth each year. We are confident about our business around the world because of the investments that we have put in place to drive sustainable sales and profit growth.

Specifically, we remain focused on our four key strategies; building dominant restaurant brands in China, driving profitable expansion and growth at YRI, improving U.S. brands positionings and returns, and driving high return on invested capital and strong shareholder payout.

Now I will turn it over to Rick Carucci, our Chief Financial Officer, who will take you through the numbers. Rick.

Richard T. Carucci

Thank you, David and good morning, everyone. I am going to review three areas today. First, our third quarter results and preview of our fourth quarter; second, the 2007 full year outlook; and third, our new capital structure plan and our full year cash flow expectations.

Looking at the third quarter, we were certainly pleased to report EPS growth of 20%, led by quality operating performance. Third quarter operating profit growth of 16% lapped a strong third quarter in 2006 when our operating profit increased 11%. That’s two-year growth of 27% in operating profit, which certainly is strong performance by virtually any standard. In addition, operating margin improved one half point versus the strong results from a year ago.

As you look at the numbers this quarter, overall Yum! results were clearly driven by strong operating performances from China and Yum! Restaurants International. In addition, the reduction in our share count of 2% and a favorable foreign currency translation that added $0.02 to EPS also contributed to Q3 performance.

Now let’s look at the third quarter by our three business segments. We will also cover items that we expect will impact these segments in the fourth quarter. Let’s first talk about our China division.

In the third quarter, China division operating profits were up 28%. Looking at just our Mainland China business separately, profit growth was 29%. Top line growth was exceptional, driven by both very strong unit growth and double-digit same-store sales growth.

In the written disclosures of the earnings release, you can specifically see our Mainland China performance for key measures in addition to the total China division results.

Our Mainland China business continues to be a key growth driver for Yum!'s overall results. These results are driven largely by the exceedingly strong competitive positions of both KFC in the western QSR category and Pizza Hut in the western casual dining category. Our China division contributed over 50% of Yum!'s overall operating growth this quarter.

One issue that affected business in the third quarter was increased commodity inflation. There have been issues in Mainland China related to pork with both tight supplies and increased prices. This contributed to greater demand for chicken and therefore higher prices. In addition, domestic China chicken supply was further impacted by lower-than-expected outputs, as well as increased exports to other markets. This led to a significant spike in chicken prices.

We believe this impact is short-term in nature. In the third quarter, food costs increased by one full percentage point versus last year. We’re able to offset half of that impact overall as restaurant margin declined by one-half percentage point.

In the fourth quarter, we expect to see even higher chicken cost than in the third quarter. This will translate into lower margins in Q4 as we are estimating about a two-point decline versus prior year in restaurant margin.

To summarize, in Mainland China we have both very strong top line performance as well as some higher costs in the near-term. We are also benefiting from a strong Chinese currency.

Overall, unit economics remain very strong and we are continuing to rapidly expand both KFC and Pizza Hut, as well as develop new brands.

Our development pipeline looks strong and we expect to exceed our target for 400 new builds in the China division for 2007. Net net, we are as bullish as ever about our China business and the portfolio of brands we are building in a market which is likely the world’s biggest opportunity for building restaurant brands.

For Yum! Restaurants International, or YRI, the third quarter was another excellent quarter with reported operating profit growth of 21%, lapping 22% growth last year. Even if you exclude foreign currency benefit, this year’s operating profit growth was 14%, lapping 20% last year. We believe this is an indication of the underlying strength of this great business.

Our top line performance at YRI was very strong, with system sales growth of 11% in local currency terms lapping a very strong plus 9% last year -- clearly not an easy comparison. Importantly, our systems sales growth strength is broad-based with very few markets under-performing.

Overall, our franchise business in YRI grew third quarter profit by 12%. This was led by a very strong profit growth in most markets, including our Asia franchise business unit, the Middle East, Europe, South Africa, and the Caribbean Latin America markets. Our company markets in total grew profit by 14%, excluding the positive impact of for-ex. This was led by strong performance in Australia, Mexico, and both the KFC and Pizza Hut businesses in the U.K. market.

Company restaurant margins declined slightly due to the inclusion of our wholly-owned Pizza Hut U.K. business, versus last year when it was a 50-50 joint venture. Excluding this impact, our margin rose by 0.7 percentage points.

Finally, our third quarter was achieved despite higher G&A costs related to the costs of owning the U.K. Pizza Hut business, investment spending in Russia, India, and Taco Bell International start-up costs. These are businesses which will potentially be large sources of future growth for YRI.

We have seen continued growth in these emerging markets, while still a small segment of YRI’s business, system sales for the emerging markets grew at 30% in the third quarter.

Hopefully, you can see that YRI is performing well. Like in China, our competitive position at YRI continues to strengthen. Our development pipeline is strong and we expect to open over 850 restaurants this year. This business is already extremely valuable to Yum! and we are building for future growth while also delivering excellent results today.

Now on to our U.S. business; overall, our U.S. performance improved versus the first half of this year, with 1% growth in both same-store sales and operating profit. We were happy to see this expected improvement but overall results were still below our ongoing target for growth.

The good news is that we expect further improvement for our U.S. results in the fourth quarter, particularly at Taco Bell, our largest U.S. brand. As you can tell from the details of our release last night, the operating environment is a bit challenging, with headwinds from both commodity inflation and wage rate inflation. We are pleased to report that each of our brand teams is working very hard to stay ahead of the curve in this environment. We clearly have to play an A-game operationally during these times, including being very diligent with menu pricing, menu mix management, executing against productivity opportunities, and reducing overhead cost structure where it makes sense.

One example I will cite is that Pizza Hut in the U.S., we are challenged by very high cheese prices and minimum wage hikes. The team has offset these factors by doing a great job of eliminating unprofitable discounting. By managing these items, our U.S. business was able to show positive profitability in the third quarter, despite commodity inflation of $16 million.

In terms of top line performance in the U.S., as you just heard from David, each brand is developing sustainable sales layers. Getting to a higher level of performance in our U.S. business in terms of top line growth and higher returns is a clear priority.

Overall for Yum! in the fourth quarter, we expect continued solid operating performance despite continued inflation challenges. We expect fourth quarter operating profit growth in the range of 8% to 10%, led by solid performance in each of our three businesses.

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

At this point for 2007, we expect first that China will exceed its full year target of 20% on a reported basis. YRI will clearly exceed its full year target of 10% growth, likely exceeding 15% growth in reported terms, and U.S. profit will be even with last year.

In terms of global development, we now expect to open more than 1,200 new units this year in China and YRI combined. For the full year 2007, we increased our full year EPS guidance to plus 13%, or $1.65 per share. Our previous guidance was 12% growth. This would mark the sixth consecutive year of at least 12% EPS growth.

Now let’s talk about our capital structure plans and cash flow expectations for the year. As you saw in our release last night, we have decided to increase the level of balance sheet leverage from where it is today. We have studied this at length and believe we have a structure that is very supportive of our global business for the foreseeable future, yet provides the degree of comfort and what we like to call sleep-at-night durability. At the same time, it does test our balance sheet to contribute to the overall Yum! enterprise with a more efficient capital structure, while meeting our investment grade target.

We see this as an opportunity to return even more cash to our shareholders and increase shareholder value as we acquire the shares below intrinsic value.

Now let’s talk about what everyone really appreciates about our business, and that’s our great cash flow. For 2007, you should expect another year of substantial levels of free cash available for payout to our shareholders. We expect to return at least $1.3 billion in cash for 2007, which is even more cash than the $1.1 billion returned in 2006.

For the full year 2007, we expect a 4% reduction in our share count due to share buy-backs and our dividend yield is substantially higher than it was a year ago, now about 1.7%.

To wrap up, we expect a very successful year of operating performance from our global performance. We expect 2007 will be considered as another year of consistent financial performance, another year of impressive global growth, and another year with strong global cash flow returned to shareholders.

As a reminder, we are planning our upcoming investor meeting in New York in December. At that meeting, David, Tim Jerzyk and I will review the following: our 2008 outlook, key trends for Yum! and the industry, and an update of our U.S. refranchising and our outlook for ownership plans using our earn-the-right-to-own principle as a guiding light.

Back to you, David, for a quick overview of our 2008 expectations.

David Novak

Okay, Rick, thank you very much. Now, for those of you who follow our company, you know that our annual target is to commit to doing at least 10% earnings per share growth. Before we field any questions, I’d like to take a couple of minutes to talk about 2008 and to share four key reasons why I believe we will continue to deliver at least 10% EPS growth into next year.

First, China and YRI have demonstrated in 2007 that they are sustainable growth engines, able to overlap strong performances from 2006. This year, they will both open a record number of new units and deliver solid same-store sales growth, providing us with even more scale in more countries and territories, giving us even greater marketing clout to help feed the momentum for next year.

Second, our U.S. business is well-poised to deliver stronger results in 2008, with Taco Bell gaining transaction momentum as we speak and Pizza Hut and KFC positioned much more strongly than in recent years to demonstrate sustainable growth.

Third, we are embarking on our most ambitious share buy-back program yet, with plans to return a record level of cash to our shareholders over the next two years.

And fourth, we have a strong track record of delivering on our commitments, with 2007 representing the sixth consecutive year of exceeding our EPS growth target of at least 10%.

These four factors give me tremendous confidence to reaffirm this goal for 2008 and we look forward to talking about all of this in more detail at our upcoming conference.

So with that, what I would like to do now is open it up and answer any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ashley Woodruff with FBR.

Ashley Woodruff - Friedman Billings Ramsay

Thank you. A couple of questions on China and margins in particular; when you start to look into 2008, and I know the commodity markets are difficult to predict, but based on what you are seeing now on the supply side, demand for chicken, what are your expectations as we go into certainly early 2008? Should we continue to see this type of pressure that you are looking for in the fourth quarter?

Richard T. Carucci

We actually really don’t know. We do expect to have high chicken costs in the first month of the year, because have contracted to that time frame, but we are not sure how long this bubble is going to exist, so we are just -- obviously we are spending a lot of time looking at that now and are ready to adjust to several scenarios, but we really don’t know what the environment is going to be beyond the first month of the year.

Ashley Woodruff - Friedman Billings Ramsay

So you haven’t started to enter into any contracts for 2008 yet?

Richard T. Carucci

Except for the first month of the year, right.

Ashley Woodruff - Friedman Billings Ramsay

Right, and then also looking at just China store margins longer term, say over the next three to five years, as you -- your margins have been much higher than average certainly than any of your other markets, and part of that’s been the great demand, strong same-store sales. As you start to grow into that demand through the unit growth, should we expect just naturally for those store level margins to come down in the China division?

Richard T. Carucci

I certainly don’t expect that. Clearly, as we’ve said for a long time, we are still at the early stages of China development. We have a couple thousand restaurants in a market of 1.3 billion, so we think there is a lot of room there. We don’t think we’re in the developing stage, per se.

The second piece of it is our competitive position in China is extremely strong. If you really look at it, it is really just McDonald’s and KFC in the QSR space, western QSR space, so we don’t see any special pressures there.

I do think that the way we are going to get the margins will be a bit different in the sense of I do think that there’s likely to be a little bit more pressure on food inflation over time, but with that we’ve taken very little pricing and so far, the pricing we have taken, the market’s been able to absorb as the economy there continues to grow.

So I feel pretty bullish about China margins over the medium and longer term.

Ashley Woodruff - Friedman Billings Ramsay

Thank you.

Tim Jerzyk

Thanks, Ashley. Jennifer, next question, please.

Operator

Your next question comes from Rob Wilson with Tiburon Research.

Rob Wilson - Tiburon Research

Yes, I was wondering if you could explain why U.S. G&A costs declined quite a bit dramatically in Q3. And also, you said your operating profit goal is 8% to 10% I believe in Q4. What is your store margin goal in the U.S. division in Q4? Thank you.

Richard T. Carucci

We don’t provide guidance in terms of restaurant margin by quarter, certainly by segment. We gave you an update on guidance for the full year in the earnings release. There’s a link in the earnings release, and we said that U.S. and China margins would decline slightly for the year, so that’s as close as we are going to get on that.

The performance, as we said earlier though, we expect the U.S. to be better, solid operating profit growth in Q4, and an improvement in Taco Bell, so overall performance will be better.

Rob Wilson - Tiburon Research

And G&A costs in Q3?

Richard T. Carucci

G&A costs, if you look at the segment of the earnings release last night on the update on refranchising, keep in mind we’ve refranchised almost 700 stores in the U.S. since the beginning of ’06, and G&A reductions related to that tend to lag as you refranchise, so now you are beginning to see the impact, the cumulative impact of that.

Rob Wilson - Tiburon Research

Okay, appreciate it. Thanks for taking my call.

Tim Jerzyk

Thanks. Next question please, Jennifer.

Operator

Your next question comes from Steven Kron with Goldman Sachs.

Steven Kron - Goldman Sachs

Thanks. Good morning, guys. A couple of quick follow-ups on China; first, Rick, you mentioned price to date has been pretty low. I think last quarter you were talking about using price to offset some of the inflation, so there was some discussion around that. Can you quantify how much price contributed to the 11% same-store sales gain at this point?

Richard T. Carucci

We don’t comment on the exact percentages but when we did take price increase in the third quarter, it was higher than our normal price increase and the market, as you can see from the sales results, did respond okay to that price increase. Now that price increase is not enough to cover the extra spike we had in chicken costs in the fourth quarter but you can see it mostly offset the first spike we had in the third quarter.

Steven Kron - Goldman Sachs

So to that point I guess, Rick, it seems as though the spike in chicken has been more due to more demand from the pork commodity inflating. What do your suppliers say as they look out from a pork standpoint? And to the extent that that normalizes a bit, might we be in a position that there’s a risk of the demand for chicken reversing if pricing starts to go up here and pork stabilizes a bit?

Richard T. Carucci

Again, I can’t say I’m an expert on pork prices. I think what’s happening though, Steven, is there is unusual pricing in both right now so I don’t think you could look at this as a normal market. The prices are up in the 40% range for pork and chicken, so I think that the suppliers, quite frankly, this is a bit new for them.

The advantage that chicken does have over pork is that the growing cycle is a lot shorter so you have a better chance for the market to correct itself more quickly in chicken than it has on the pork side.

Steven Kron - Goldman Sachs

Okay, and then Taco Bell U.S., I guess David, you made the comment that franchise stores over the last few weeks have shown improvement. I think you said positive sales more from product initiatives, I guess. Could you just comment on company stores, why those might still be lagging?

David Novak

I think our franchise system, I guess we have 80% of our stores, or more like 75% of the stores are franchise, 25% are obviously company. I think we’ve -- basically our operating majors are pretty similar so we actually have been doing some analysis on that and I really can’t point to one or two things that says this is the reason why.

We just think -- it’s not a huge difference, so they are actually closer than you think, so we are positive with the franchisees and slightly down with the company stores. So over time, we think that will balance out.

Steven Kron - Goldman Sachs

And then just one last one on KFC, the increase of a half-a-point advertising from the franchisees, how does this now or how will this compare, I guess, as a percentage of sales to your other brands?

David Novak

It’s primarily more of a shift from local to national, which gives us more rating point power through television. But our basic percent of sales in terms of the advertising are comparable.

It’s all very close. The big challenge when you are dealing with franchise networks is that when they give up part of their national dollars, they are giving up some of their local money. It’s basically fixed by contract, and so the only time the franchisees will do that is when they are really excited about what the brands are working on and if they see that it will end up giving them more ultimate scale and presence in the marketplace with their media.

We are very pleased to see the franchisees excited at both Pizza Hut and Taco Bell about the plans that we have in place and the fact that they would give up some of their local media to support what they think are going to be better national calendars.

I think that’s the thing that drives all of this.

Steven Kron - Goldman Sachs

Thanks very much.

Tim Jerzyk

Thanks, Steven. Next question please, Jennifer.

Operator

Your next question comes from David Palmer with UBS.

David Palmer - UBS

Thanks. Congrats on the quarter. Two questions for you; one on the refranchising in the U.S. and I guess a second on the China ’08 new unit openings, or ways that we can think about that. On the refranchising in the U.S., you are talking about 1500 units from early ’06 to late ’08, I think it is. I think to get to that number, you need over 800 units in the next five quarters or so. How should we think about the rough breakdown by quarter?

And then, when you are thinking about the -- perhaps as we would think about modeling that, would that be roughly neutral to profit after we consider D&A and G&A reductions, with those refranchises? Or perhaps will that tend to be a little bit different now, begin a little bit more hurtful to profit as you get deeper into the refranchising?

I guess the second one on China is how should we think about the new opens in China next year? Perhaps you could give us some color about the pace.

Richard T. Carucci

First, regarding the refranchising, David, we still believe we are on track for the three-year target that we’ve laid out, so no changes there. Regarding the pace by quarter, really hard to judge. We can’t predict it. It’s hard to model it but to your point, not a huge impact on the long-term operating profit. As we mentioned earlier, it takes a little bit of time for the G&A to catch up to the reduction in units but that’s now been going on for a while, so again, it’s roughly neutral on an operating profit basis and the balance is not a lot a different than what’s occurred so far.

Regarding China and new units for ’08, as we mentioned before, we feel good about this year. The pipeline is strong and again our normal, we are probably still sticking to our normal tune, David, which is at least 400 units for the China division.

Tim Jerzyk

We’ll have more details on that, David, for our New York meeting.

David Novak

I think the main thing on the refranchising is, to summarize, is we are on target and we are focused on doing it right. We are going to put our stores in the right hands of the right operators so that we have the best long-term prospects as we go forward.

David Palmer - UBS

Do you anticipate a few hundred units, KFC units being closed because of this reimaging requirement by the middle of ’08?

Tim Jerzyk

David, we had previously said somewhere in the range of potentially 100 to 300, and we still think that that is the case. But it is looking maybe a little bit optimistic. We could be better than that, at least better than the high end.

David Palmer - UBS

Thanks very much.

Tim Jerzyk

Thanks, David. Next question please, Jennifer.

Operator

Your next question comes from Jeffrey Bernstein with Lehman Brothers.

Jeffrey Bernstein - Lehman Brothers

Thank you very much. A couple of questions, just first on the U.S. cost outlook. I know you commented on China. If you could give us an update on your commodity cost outlook for I guess the rest of ’08 and your initial outlook -- I’m sorry, the rest of ’07 and your initial outlook for ’08.

And then just as a follow-up on that, where you currently stand in terms of the menu pricing in the U.S. I know you mentioned a menu price increase in your release. I’m just wondering your comfort levels in terms of taking pricing while the traffic remains difficult to achieve.

Tim Jerzyk

In terms of commodities on ’08 first, we’ll give you an outlook on that just like we did last year at the New York meeting, a full view on that. We have our annual operating plan reviews coming up and we’ll get a good review of that and then provide that information to you. I think it’s December 12th in New York.

As far as ’07, we still anticipate -- we said coming into the year 2% to 3% U.S. inflation on commodities and we are still right in that range, at the high end of the range, which is what we said last time. That has not changed, so we still expect 3% inflation for the year. In terms of dollars, about $45 million.

Richard T. Carucci

Regarding the menu pricing, I mentioned in my comments that Pizza Hut basically has offset some of its inflation by reduced discounting, so they haven’t really taken menu pricing but they have gone on the reduced discounting front. Regarding the other brands, our menu pricing has roughly offset most of the inflation.

What we did, we sort of anticipated this could be an inflation year, what we did is we took some small increases at the beginning of the year and then another small increase about the middle of the year and together, those have largely offset the inflation, which was in part how we were able to keep the profits slightly positive in this environment.

Jeffrey Bernstein - Lehman Brothers

Do you think then the pricing is at all having an impact on traffic? Do you do any studies to kind of see the balance of the two in the U.S.?

Richard T. Carucci

We look at it a lot but what we do know is that you just can’t sit there and take the inflation, so we try to obviously offset the inflation first with productivity initiatives and then we take modest pricing, so what we try to do to be smart about it, to take it in small chunks versus big chunks and not take it on the most price sensitive items, so we do understand that in this category, we have to provide great value so we still focus in on that but we also take modest pricing to protect the P&L.

Jeffrey Bernstein - Lehman Brothers

And then just one follow-up on your long-term debt, obviously you guys have been talking about it for a while so we’re glad to see the news. I’m just wondering if you could talk about the thought process that went into I guess the determination of the appropriate leverage levels and whether the current credit market environment had any impact on the decision. You also mentioned the use of ongoing refranchising proceeds for the share repurchase. Just wondering if you can give your expectations on those process for perhaps ’08.

Richard T. Carucci

I’ll give a brief overview of the thinking and then I’ll let Tim comment further. You know, this thing is just a balancing game. We try to come up with an overall financial balance that we think works for managing the company and works for our shareholders, and obviously we are fortunate that all of our businesses generate cash, including China, that we have a pleasant problem of figuring out what to do with the cash.

Regarding the debt level, we are trying to balance keeping a strong balance sheet, which we are very committed to. At the same time, we also recognize that we love our stock right now and think we’ve done a lot of share buy-backs historically. We’ve taken 12% of the shares off the table in the last three years and we look at this as an opportunity to do even more of that going forward.

So we just try to balance really all of the factors that are out there. I’ll let Tim talk a little bit more about how we plan to go about getting that done.

Tim Jerzyk

Jeff, first of all, if you look at the credit markets, we definitely like the rates, where they are today and things are improving as time moves one. Second, we viewed our balance sheet was under leveraged from two perspectives. We believe we were not challenging it necessarily, our balance sheet, meaning it to be as efficient and effective as we do challenge our businesses every day. And we know we are a much stronger company, particularly even just versus a few years ago. And as David mentioned earlier, we were also targeting the sleep-at-night comfort level because we do want everyone to feel comfortable with a higher amount of leverage, after we worked very hard to get where we are today.

But when you look at our company today, we have a global portfolio that is delivering very well. It provides a lot of diversification in terms of geography and brands. We have substantial, consistent and growing cash flow. That’s a very powerful story, and we have a large and increasing franchise base in the U.S. business and in YRI that’s pretty significant.

And then on top of that, where we are investing cash, Yum! China is [self-funding], so the overall picture was a very good one we viewed in terms of increasing our leverage, and as I said, we wanted to task our balance sheet to be more efficient and deliver more to the overall enterprise value of the company.

Jeffrey Bernstein - Lehman Brothers

Great. Thank you.

Tim Jerzyk

Thanks, Jeff. Next question please, Jennifer.

Operator

Your next question comes from Rachael Rothman with Merrill Lynch.

Rachael Rothman - Merrill Lynch

Good morning, guys. Just to follow up to Jeff’s question, if I could; should we assume that you will be using your revolve to do the repurchases, or is there any thought about floating bonds? And then, are there any covenants in your revolver that, based on different leverage levels, your interest rates either tick up or down? I haven’t had a chance to pull the credit facility agreement.

Tim Jerzyk

We do have some provisions in our credit facility in terms of leverage levels but we are well below the levels that you would need to be concerned about.

In terms of how we are going to do this, we do anticipate going to the bond market. We don’t have any specific timing that we are going to provide. We are going to be opportunistic about it. We anticipate going sometime by the end of the year to the bond market.

If you look at our debt profile in terms of the maturities, we have a bond due next year, early next year and then we have some in ’11 and ’12, 2011 and 2012, and 2016. We would like to extend that out. We think long-term rates are very good right now so we definitely would like to extend out the profile.

Also, when we look at it, we would like to stretch it out and have alternating years where there is no debt due, so we kind of view that as somewhat of a natural hedge. We like the ability to be able to use the revolver, as you said, to pay off bonds in a given year if the credit markets aren’t really good, so that we can sit on our cash and maybe go to the market the following year.

Rachael Rothman - Merrill Lynch

Great. Thank you. And then, can you just remind us in terms of in the U.S., your chicken contract, where you stand on that? Does that come up for renewal in December?

And then on labor, could you talk a little bit about the opportunities to get margin leverage maybe next year, even though minimum wage will step up again? And the same question for China, just some comments around labor. A number of the other companies that we cover are seeing pretty strong labor increases in China.

Tim Jerzyk

In terms of our chicken in the U.S., we do contract most of our chicken in the U.S. across all three brands, and most of those contracts are in the process of being renegotiated, so we don’t really have any information on what we’ll be doing or experiencing the next year, but we’ll provide, as I said, the full commodity outlook in our December meeting.

Richard T. Carucci

Regarding the labor question, Rachael, on both the U.S. and China, we do expect to continue to see some wage inflation in the U.S. over the next few years. As Tim said, we don’t know what will happen on the commodity side yet but we’re going to be prepared to deal with modest inflation on that side as well. So that’s sort of our initial expectations but we’ll share more at the December meeting.

On China, China labor has actually been going up for us fairly steadily over the last several years and it continues to go up as the people get richer, quite frankly. So we just sort of see that as part of the costs of doing business in China. It has been there for the last five years and we expect that going forward.

Rachael Rothman - Merrill Lynch

Great. Thank you so much.

Tim Jerzyk

Thanks, Rachael. Jennifer, next question please.

Operator

Your next question comes from Glen Petraglia with Citigroup.

Glen Petraglia - Citigroup

Thanks. It’s Petraglia. Most of my questions have been -- that happens all the time. Most of my questions have been answered but I was hoping you could give me an update on the Pizza Hut U.K. refranchising efforts, how many have been completed at this point and whether you still think you are on track to hit your targets.

Richard T. Carucci

I think so far, the answer is none have been completed so far, but having said that, we are still on our target of completing it over a three year period so again, we still feel good about our ability to do that. Obviously it helps as we are getting little better results the last quarter in the U.K., and that will keep us on track.

So we’ll keep working on it. We’ll give you an update when we have more, Glen, and I can understand anyone who’s last name has ever been mispronounced.

Glen Petraglia - Citigroup

Thanks.

David Novak

I think again on this one, we believe we will deliver on our commitments in the U.K. We had a great third quarter. What we really want to do here again is get the right franchisees and make sure we have the right partners. There is no need for us to rush, so we are more on the John Wooden phrase of be quick, but don’t hurry.

The biggest thing we can do, I think, is get the business back where it really needs to be so we can command the best prices and get the best franchisees.

Glen Petraglia - Citigroup

Have you guys been holding off in terms of looking to refranchise these units until you fix it, or has it just been that you just haven’t had the interest at this point?

Richard T. Carucci

No, we do have interest. We have packages out there and we have people bidding on those packages. We are obviously in the first few -- our experience when you do some of these, the first few you are going to make sure you establish a good price precedent, so to David’s point, we are not going to hurry through to hit a numerical target. We are more looking at how do we get good proceeds and the right franchise partners over the three-year period.

Glen Petraglia - Citigroup

Thanks.

Tim Jerzyk

Thanks, Glen. Jennifer, next question please.

Operator

Your next question comes from John Glass with CIBC.

John Glass - CIBC

Thanks. Good morning. Maybe I missed this, but can you break out specifically the sources of cash for this $4 billion? In other words, have you articulated exactly how much debt you are willing to take on? Can you talk a little bit about the timing? Does the fact that you've authorized $1.25 billion over the next 12 months mean that most of the buybacks happen in '09, or is that just a formality?

Tim Jerzyk

First of all, on the timing of the $1.25 billion, as always we'll be opportunistic with it. We don't specify timing. I think the important thing there was the level of the authorization was substantially higher than in the past, so we take that as a sign that we intend to be pretty active; but we are going to buy it opportunistically, just as we have in the past. We'll report to you every quarter -- as we always do -- on the level of buyback that quarter. In terms of the $4 billion, we said it would be sourced from operating cash flow, refranchising and additional debt. We did not cite the incremental amount of debt. In terms of our overall structure in terms of additional leverage, when we looked at the strength of our company, we believe we can take our adjusted debt to EBITDA level up to as much as 3.0.

John Glass - CIBC World Markets

In this conversation, did you also talk about a dividend payout ratio, make any commitment to a higher payout ratio?

Tim Jerzyk

Well, we did just double our dividend with the second quarter payment and our annual payout ratio that we developed, in terms of policy on that, was 35% to 40%. So with that payment, we're now about in the middle of that range.

Operator

Your next question comes from Jason West - Deutsche Bank.

Jason West - Deutsche Bank

I just wanted to get a little more color on the fourth quarter outlook. You guys are guiding 8% to 10% operating profit growth. I'm assuming the share count will be down fairly significantly; but you're saying that EPS will be down year over year. I'm wondering if there is something I am missing there. What do you think the tax rate will be? Or, are you incorporating some sort of debt offering there?

Richard T. Carucci

Well the big impact as you said, Jason, is really the tax rate. Last year in the fourth quarter it was unusually low, a 17% tax rate, and we're assuming a more normal tax rate in the fourth quarter this year. Our full year guidance is in the 26% to 28% range and like I said, a normal tax rate, often a 17% tax rate, gets double-digit increase between operating profit and EPS. So that's really what's driving that difference.

Tim Jerzyk

As we said earlier and it's in the release I believe, our expectation for operating profit growth for Q4 is in the 8% to 10% range. We expect a very good quarter from an operating performance perspective.

Jason West - Deutsche Bank

Can you talk about the CapEx outlook? Is that still 650 for this year and the foreseeable future, or do you expect any material move in that number?

Tim Jerzyk

We're still in that range. 650 might be plus or minus $25 million.

Jason West - Deutsche Bank

At Taco Bell, can you talk about the progression of traffic through the quarter? Did you see an improvement of traffic as the comps obviously got a little bit better, or was it more of a pricing-driven improvement relative to the first part of the year?

Tim Jerzyk

It's only been a few weeks in terms of the uplift that we've seen, but we expect to see significant traffic growth in the fourth quarter.

Operator

Your next question comes from John Ivankoe – JP Morgan.

John Ivankoe – JP Morgan

It may be a little bit late for this question, but David Novak, I think I heard you mention that your franchise operations and company operations are testing about the same now from a customer perspective. Did you say that in one of your prepared remarks?

David Novak

The comment was, what was the difference between the Taco Bell performance with franchisee versus company. The Taco Bell franchisees are up. We're slightly down, so it's not a big, huge difference. The Taco Bell system is pretty much coming back in unison with a little bit more capability with the Taco Bell franchisees.

John Ivankoe – JP Morgan

So that was just a reference to sales. Let's talk about then from an operating perspective. Something that used to be a very big part of your business -- and presumably still is, it's not discussed as much – is your CHAMP scores and your different operation scores that are done at the store level. The point of the comment in question, KFC and Taco Bell have obviously underperformed in 2007 a lot of the traditional QSR chains quite a lot; and I guess for different reasons. Can you comment, especially as you move to more of a franchise model, if there's any type of operational changes in terms of how you can begin to raise the bar in terms of competing against some of your peers that might be doing a better job right now?

David Novak

Well, I haven't seen a tremendous amount of evidence that our peers are doing a hell of a lot better job than us, but I'll take your challenge at face value here. I think what we're continually working on and it is our number one strategy, is to run great restaurants. We focus on CHAMPS, the measure that we look at is 100% CHAMPS with a “Yes” attitude. Basically what that says is that we deliver the basic customer expectations: cleanliness, hospitality, accuracy, maintenance, product quality and speed. We deliver all of that 100% to our standards. That's the measure. We basically have been improving that measure for the last five years, about one to two points a year, most of our brands. We have very little difference between the company and the franchise performance overall. I think that we're very focused on this basic expectation, because we know that our brands are extremely powerful and the better we operate, the better we're going to do. So it is a focus that we have. We invest very significantly in our operations in terms of making sure we put the resource up against the talent, the processes that you need to make steady improvement. It's also the most difficult part of our business to make dramatic improvement on. It's more of a slug it out type of thing. We try to refranchise to our best operators in terms of customer measures as well, John. That's big; we say, is this franchisee growth-ready? If their operational measures have slipped or if they're below standard in any way, we don't refranchise to those types of operators. I think as we have refranchised, I really feel like we're putting our stores in better hands, and I think that's the goal, to make sure that we're continually optimizing and getting the best possible group of operators that we can find.

Operator

Your next question comes from Jeff Omohundro - Wachovia.

Jeff Omohundro - Wachovia Securities

Just two questions on brand initiatives in the U.S. First maybe an update on Taco Bell breakfast. Secondly, an update on WingStreet, particularly as it relates to progress with franchisees?

David Novak

I'll be happy to give you an update there. Let me just start by stepping back and laying out what we're really doing to turn around our U.S. business. The way we look at the U.S. business is that the best asset that we have going for us is the fact that we have 20,000 underleveraged assets. We basically do about half the volume -- or less than half of the volumes -- that McDonald's is doing in the United States. We're primarily single protein, single day-part driven, sometimes two day-part driven. We think we have a tremendous opportunity to get a lot more out of our existing asset base.

Five years ago with McDonald's, everybody had the doom and gloom story for McDonald's. We take a lot of the heart out of the fact that they've taken that business and added close to $400,000 to $500,000 of sales out of their existing asset base. We are very focused on doing the same thing as well. Not the $400,000 but let's just try to cut that in half. We would be pretty happy, I think, five years from now if we could do that.

I think there are two key factors that really give me a lot of confidence that we can succeed. First of all, our franchisees are very excited about the direction of our brands and they've committed to incremental media, as I talked about, on a national basis with both KFC and Pizza Hut.

I think even more importantly, all of our franchise systems are very excited about the strong vision that we have to really focus very single-mindedly on developing new sales layers to really raise our restaurant volumes. Beverages and breakfast are two major opportunities that we have at Taco Bell, and I'll talk more about breakfast in just a second. At KFC, we're focused on the grilled platform, on-the-go, portable-type products for lunch and we don't have any deserts to speak of. At Pizza Hut, we're very focused on not only continuing to lead in pizza innovation but really leverage our WingStreet brand on a national, scalable basis and also bring other ways to leverage the home meal replacement category to bear.

When we look at this, our franchisees are saying hey listen; we're not only going to innovate around pizza, we are clearly the leading innovator at what you do with all of the ingredients that we have at Taco Bell today around pizza and chicken. But I think what everybody is excited about is we're really focused on incremental, additional, meaningful sales layers as we go forward. Now one area, obviously, is breakfast at Taco Bell. We are absolutely convinced that Taco Bell will have a breakfast and we're very focused on it. It's going to take a long-term investment and long-term focus to get this done, because breakfast is a category that is probably the most deeply entrenched and the hardest behavior to really break into. But nevertheless, we think with the differentiated menu and approach that we're working on at Taco Bell, we can be successful.

We went into, I think, four markets earlier in the year and got very good operational response to our breakfast products, but we also saw opportunities to do an even better job. So what we're doing right now is we are focusing our testing efforts in Omaha and we're working on some things that we think will even give us a much more innovative approach up against the breakfast occasion. Today, we really haven't put a lot of marketing behind it. Basically four weeks of television. We know that we're going to have to be much more aggressive as we go forward. But we've got a lot of learnings, we're moving in the next phase in Omaha and we're looking at some additional markets, one or two more markets, that we will take alternative approaches in to really make sure that we go up with against a differentiated breakfast. I can tell you that Greg Creed, the President of Taco Bell, and the team there, they know that this is a big opportunity. We know it's difficult, but we're very committed to making it happen and the products that we have are excellent, so we think we can definitely win.

The other thing that you asked me about was WingStreet. WingStreet, we already have 1,000 WingStreets. This is a multi-brand that we created for Pizza Hut. We've created a WingStreet format for our traditional dine- in assets to complement what we're doing on the delivery business. A week or so ago, I met with a few of the most influential Pizza Hut franchise leaders, and they're very committed to work with us to help us scale this idea. We're working on lower cost options to put in the equipment package, but the goal is to ultimately get this into national distribution, and we're working on making that happen in the next couple years. That gives us a chicken platform at Pizza Hut that we never had and another point of difference. That is going to complement what we're doing on the value arena, which you will see news on next year that we're very happy about, and some other things I really can't talk about. I think that Scott Bergren and the team at Pizza Hut have done an excellent job crafting a new vision for incremental sales layers at Pizza Hut that has the Pizza Hut franchise very excited.

I realize when you look at the U.S. business over the last five years, we've only averaged about 1% to 2% profit growth, 1% to 2% same-store sales growth, 1% to 2% cash flow growth. It's a very stable business, but it has not been a big part of our growth portfolio. We're really proud that we've made Taco Bell the second most profitable brand in the U.S. We're proud of the turnaround that we've had at KFC and how the franchisees are excited. I think Pizza Hut has been our big problem child. We've made a lot of progress in the last year there. We have a lot of wood to chop to get this up to the growth rate that we can feel good about, but I just want every investor to know that we're not sitting here clipping coupons in the U.S. business. We're holding ourselves very accountable to get this business moving and growing. Our target is to do at least 5% a year. We feel like we'll definitely make a lot more progress, obviously next year, even if it's because we're overlapping poor performance; but more importantly, we want to build a world-class business here in the U.S. to go along with the world-class business that we've done on our international business.

When you look at international, ten years ago we had infrastructure; now we've got a global powerhouse. When you look at the U.S., we've done a nice job getting our brands back to a more stable, respectable base but we know we should be doing a lot better and we will. We're very committed to doing that.

Operator

Your next question comes from Mark Wiltamuth - Morgan Stanley.

Mark Wiltamuth - Morgan Stanley

I just want to dig in a little bit more on Taco Bell. Here is a brand where you have historically done very well with value and also menu innovation; those are two things that seem to be resonating for others in the QSR space right now. I'm just curious what you're hearing from consumers on what are their concerns? Are you still getting lingering concerns over the Ecoli incident or the rat video, or is there something else going on?

David Novak

I think that we have a little of that lingering in our research; it's still there. Frankly it's taken us longer to recover at Taco Bell than we envisioned. I think it's because the press was so dramatic and so pronounced and it came in a one-two punch; first with the Ecoli and then with the rodent issue. When you look at the Taco Bell brand measures though, you continue to look at a powerhouse. We're top tier in value, we have uniqueness in terms of our food, we are clearly the number one variety choice which really makes us the place you go to when you're thinking outside the bun. We have so much to build from. We're actually going to have net new unit growth at Taco Bell this year, so we're actually growing the brand in one of the most difficult years you could ever have, certainly from an attitudinal standpoint. So this brand is a great brand. I always say, it's the second most profitable brand in the United States. People don't even know that. We have great margins and we've got lots of leverage opportunities in breakfast, beverages, desserts. We're going after meaningful variety. The great thing that I feel good about is that we've got that value platform to build from. Clearly with gas prices the way they've been, the pressure on the customer, everybody else in the category is really competing down in that lower end so we do have more competition on the value side, but we're going to move forward through innovation and continuing to bring great value to the marketplace. I believe very strongly that Taco Bell will be back.

Mark Wiltamuth - Morgan Stanley

Is your weakness still regionally focused where those two incidents occurred?

David Novak

We still have a softness in the Northeast; we are obviously weaker in that area but we're bouncing back, slow but sure.

Operator

Your next question comes from Eli Lapp - Morgan Stanley.

Eli Lapp - Morgan Stanley

On the last call you guys were sort of deliberating about the merits of investment grade. Obviously you're erring on the side of conservative. I was wondering if you could give us a sense of how fluid that internal debate is? Is it purely rate driven? I think you drive home the fact that your business could probably support perhaps even more leverage than you're putting on now. I just wonder if you could walk us through that deliberation.

Richard T. Carucci

I think it comes back to what I mentioned earlier, and that's just getting balance. Again, as I've mentioned before, we feel really good about our stock price. Tim mentioned that we thought the balance sheet could work harder. By the same token, we like having a strong balance sheet and being able to borrow without securitization and those types of constraints. We spent a lot of time thinking about it, and we're comfortable with this course of action. We plan on proceeding with this course of action and it would take something fairly major in the marketplace to shift on that.

Operator

Your next question comes from Joe Fischer - Bear Stearns.

Joe Fischer - Bear Stearns

I want to clarify; on the national ad spend increase at KFC and Pizza Hut, that's not incremental advertising dollars? That is just the shift from local to national in both cases?

Richard T. Carucci

Yes.

Joe Fischer - Bear Stearns

On China and the chicken cost, I was wondering, is there any opportunity or barrier to importing chicken into China? Have you thought about that?

Richard T. Carucci

Yes, there are certain quotas by country that do limit import into China. Obviously we are working hard to get imports in, but we are subject to those quotas.

Joe Fischer - Bear Stearns

Can you tell us what the other three Taco Bell test markets are besides Omaha?

David Novak

We are only in Omaha right now.

Operator

Your final question comes from David Palmer - UBS.

David Palmer - UBS

Just a follow-up question on your international sales strength and the macro environment. It seems like international sales has really been the big upside of '07, if you had to isolate the big story. I'm wondering how you're thinking about consumer strength and how that's contributing to that, and how you might be thinking about economic factors being a positive or a negative for ‘08, and how you're perhaps budgeting and planning against the consumer, particularly internationally, in '08?

David Novak

I think we have a pretty robust global economy that everybody is reading about, so I think that clearly gives us some tailwind. Obviously that is some upside for us. I think the big thing that we look at is how in the hell do we excite our customers? When you look outside the United States, we know we only have one major global competitor and that's McDonald's.

All of the things that we're working on right now, David, as we talk about turning around the U.S, if we develop a breakfast platform, if we develop a beverage platform, if we develop new desserts, all that stuff is going to explode into our international business faster than we can implement them here in the U.S. We've got innovation in all of those areas all around the globe.

I think what we really think is with our international business, YRI, the same issues we have in terms of under-leveraged assets are there as well. We are focused on that from a global perspective. When Graham Allan wakes up, who runs our international business, we want him to do at least as well next year. We're not giving him any planning break because he happened to have a good year this year. He happened to have a good year two years ago. What we want to do is keep that same kind of performance going. Now, what we expect out of China is to grow around the 20% profit rate. What we expect out of international is to grow at least 10% and we want to get the U.S. to be at least 5%. Hopefully the U.S. will be a lot better next year, which we think it will be and we'll get more balance in terms of our overall portfolio. So we're going to continue to task the companies to perform like we have in the past.

Tim Jerzyk

Thanks, David. Before we close out the call, there's a couple reminders for all of you. On Tuesday, October 30th we have Taco Bell Investor Day in Irvine. Call us at 888-298-6986 to register. We would be happy to have you out there. Wednesday, December 12th is our New York investor event from about 9:00 a.m. to noon on Wednesday December 12th. That's our annual update with investors. The meeting will take place at the New York Stock Exchange this year, it's a change in venue so please be aware of that. As always, registration in advance is required and you can complete that online at www.Yum.com. Please register before Monday, December 10th. Finally, our fourth quarter earnings release will be Monday, February 4 2008.

David Novak

Let me just wrap this up. I'll do this by telling you I look forward to seeing you in December where we can lay out our 2008 plans and talk about the future growth prospects that we have. We're very committed to continuing our track record of at least 10% EPS growth, because we've got China and YRI really demonstrating that they are sustainable growth engines. They had a great 2007 on top of a 2006. They're both opening up a record number of new units, which obviously bodes well for next year’s profits, as well as the fact that the same-store sales growth is growing as well, which gives us more scale and more countries in more territories and more marketing clout.

Our U.S. business we think is poised for stronger results in 2008. I realize that's one where it is “show us, don't tell us” but the proof is going to be in the pudding there. We feel very confident that we can do much better in the U.S. next year. We are embarking on the most ambitious share buyback program that we've had yet. As I think Rick pointed out, we've taken off 11% of our shares in the last couple of years and we plan to take off in the next few years another 20% of our shares, so that's a very ambitious and good program for us. Finally, one of the big things we've been working on from day one is to build dynasty-like performance and be a company where you can deliver, and count on us to be consistent. This will be the sixth straight year where we've delivered and exceeded our at least 10% target; this year, up 13%. We're very bullish on our business, as I'm sure you can tell.

One other point that I want to let you know is and you will probably be reading about is that next week we'll be launching the world's largest hunger relief awareness campaign. We're doing this on a global basis. We're tying in with the United Nations World Food Program where we will be raising money in our restaurants, building awareness through media and our in-store materials, and volunteering all around the world to try to help do what we can to help fight hunger. More people die from hunger than war, HIV and tuberculosis so there's a major issue that we as a company are trying to play a role in, in terms of corporate social responsibility. We're very proud of our results but as I've said before and I certainly say to everybody, that's yesterday's newspaper. We're focused on the future and the best is yet to come.

Thank you very much.

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