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Yum! Brands (NYSE:YUM)

Q2 2012 Earnings Call

July 19, 2012 9:15 am ET

Executives

Tim Jerzyk - Senior Vice President of Investor Relations and Treasurer

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

Patrick Grismer - Chief Financial Officer

Richard T. Carucci - President

Analysts

David Palmer - UBS Investment Bank, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Jason West - Deutsche Bank AG, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

John S. Glass - Morgan Stanley, Research Division

Andrew M. Barish - Jefferies & Company, Inc., Research Division

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Howard W. Penney - Hedgeye Risk Management LLC

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Operator

Good morning, my name is Keisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Tim Jerzyk, Senior Vice President of Investor Relations, you may begin your conference.

Tim Jerzyk

Thanks, Keisha. Good morning, everyone, and thanks for joining us today. 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 remind you that this conference call includes forward-looking statements. Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC.

In addition, please refer to the Investors section of the Yum! Brands website to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call. We'd also like you to please be aware of a few Yum! 2012 investor events that – basically, the balance of the year. On August 22, we will host a YRI, Yum! Restaurant International Investor Conference in Plano, Texas. On September 12 and 13, we will host an investor conference in Xi'an, China. This will be followed by an event for investors in Vietnam on September 15. If you are interested at all, please get with us very soon. Seats are filling up fast. Tuesday, October 9, third quarter earnings will be released. Finally, our annual investor update meeting will take place on December 6 in New York City.

As you may have seen recently, Rick Carucci, who has been our CFO for the past 7 years, has been promoted to President of the Yum! Brands. He will be [indiscernible] and will be available for questions. Pat Grismer has been promoted to CFO, replacing Rick. Pat's been with Yum! for 10 years, was previously CFO of Yum! Restaurants International and most recently Yum!'s Chief Planning and Control Officer. Pat will provide comments today, review our financial performance and David will provide comments today on the call as well.

Now I'll turn the call over to David Novak, our Chairman and CEO.

David C. Novak

Thank you very much, Tim, and good morning, everyone. I'm pleased to report we generated strong system sales growth at each of our divisions, China, Yum! Restaurants International, in the United States and India. In the second quarter, we did this with robust new unit development and exceptional same-store sales growth. Operating profit increased 8% while EPS growth of 1% was negatively impacted, as expected, by a higher tax rate compared to last year. Our U.S. business increased operating profit 26% in the second quarter and drove our overall operating profit growth. Based on our first half results and solid current sales trends, we reconfirm our full year guidance of at least 12% EPS growth, excluding special items.

In China, our strategy is to build leading brands in every significant category. System sales increased 27%, or 23% excluding the sales associated with our acquisition of Little Sheep. This increase was driven by an 18% increase in new units and a 10% same-store sales growth. We opened 160 new restaurants in the quarter and are pleased to raise our full year projection for new restaurants in China to at least 700 from our previous guidance of at least 600. And that will be a new record. Despite this extraordinary top line growth, I'm sure you noticed operating profit was down 4% versus last year before foreign currency benefit due to a 4 percentage point decline in restaurant margin. We expect this to be short-lived as our menu initiatives, including pricing, begin to take hold and inflation moderates. As a result, we expect modest margin improvement in the second half of this year and double-digit profit growth. Pat Grismer, our CFO, will be taking you through this in more detail during his remarks.

There's no question that China economy is slowing and sales for retailers, including us, will likely soften, especially as we overlap such strong performance from last year. We continue to be confident in our strategy of driving affordability to the growing consuming class and is backed by an extremely strong business model, which is driving record new unit development. Now given what we're all reading about the Chinese economy, I'm sure the question on your mind is: What are our expectations for sales growth in the second half of the year in China? As you know, there are 2 components of our system sales growth, new unit development and same-store sales. As I mentioned earlier, we expect to build a record number of new units in China this year. So I think it's safe to say we feel pretty good about our new unit potential continuing to drive substantial growth, not only this year but over the long term. The most compelling stat we have is we only have 4 restaurants per 1 million people in China compared to nearly 60 in the United States. And the consuming class is expected to double to over 600 million people by 2020.

As for same-store sales growth, our results over the past 6 quarters have been sensational. And we've said to you before, we simply cannot expect this double-digit pace to continue over time, although we do expect to do well. Keep in mind, we'll be overlapping 20% same-store sales growth from the second half of last year. So while it's difficult to call, our expectation is that we should be in the mid-single-digit range as we overlap last year's incredible growth.

One of the things I'm most still pleased with is that by the end of the year, our average unit volumes will be $1.7 million for KFC and Pizza Hut dine-in. And not only has this number grown 25% over the past 5 years in local currency, but that's on top of doubling the number of restaurants we now have in China. Even more impressive, the top 10% of our restaurants now have volumes of nearly $3 million. So clearly, we have a strong track record of growing same-store sales and units with plenty of room to continue this growth.

KFC now has 3,917 restaurants in China with average unit volumes of $1.7 million, and continues to expand to new cities, as well as increase its penetration in existing markets. We continue to make progress expanding dayparts and building new sales layers that further leverage these nearly 4,000 KFC assets. Virtually all KFCs in China serve breakfast, which now accounts for 7% of sales, half offer delivery service and over half have 24-hour operations. The good news is we know we're in the early innings with these initiatives and have sales growth ahead.

Pizza Hut Casual Dining now has 696 restaurants and continues to open successfully, even in the lower-tier cities. Its strategy to offer tremendous variety, everyday value and refresh 25% of its menu twice per year has consistently driven sales and profit growth. In fact, this marks the 10th consecutive quarter of double-digit same-store sales growth at Pizza Hut Casual Dining. I'd like to congratulate Peter Cowl [ph], our entire -- our Pizza Hut General Manager, and the entire Pizza Hut team for this tremendous accomplishment. Based on how the Pizza Hut team has broaden its appeal, you may have noticed that we are now successfully opening new stores more aggressively including Tier 3, 4 and 5 cities. In fact, we saw a 28% increase in new units this quarter for Pizza Hut Casual Dining. Clearly, Pizza Hut Casual Dining, like KFC, is a power brand in China.

Importantly, new unit returns for our 2 leading brands in China, both KFC and Pizza Hut, are among the best in our business with cash paybacks within 3 years. We also continue to make progress developing our emerging brands in China. Pizza Hut Home Service now has 139 units and East Dawning, our Chinese fast food brand, now has 30 restaurants. We're also in the midst of integrating Little Sheep, the leading hot pot brand in China, into the Yum! portfolio. We obviously acquired Little Sheep to strengthen its operating model and increase its market leadership position.

I want to point out that results have been soft since before its acquisition and the trend has continued post acquisition. Due in part to the long approval process and transition, we're behind where we expected to be. We are, however, beginning to see sales stabilize. We know this is a powerful brand and we have the expertise to make it even stronger. We have completed management integration into Yum!'s China team and have new initiatives moving through the pipeline. We didn't buy this business for its 400-plus units, we bought this brand for its potential to join Pizza Hut as the unquestionable leaders in casual dining and the potential to open thousands more restaurants. I'm confident our team is taking the necessary steps to build this business for the long term.

Moving on to Yum! Restaurants International, you may recall that Graham Allan retired from our company late last year. Micky Pant has taken over the reins and is making major headway. We are realigning Yum! Restaurants International, shifting more resources to the field and have organized our know-how building around emerging and developed markets. In fact, Micky and Sam Su, our Yum! Vice Chairman and China CEO, conducted a know-how building seminar which lasted a week in Shanghai for emerging markets, all our general managers in major franchisees that head emerging markets. And this proved to be a great example of how we're leveraging our people capability to make our global brands even stronger. The China model is obviously a winner and we want to spread it across the emerging markets.

Our strategy at Yum! Restaurants International remains to be to drive aggressive international expansion and build strong brands everywhere. System sales increased 7% in the second quarter prior to foreign currency translation. Units increased 3% and overall same-store sales grew 4%, while operating profit increased 6% in the quarter. We continue to produce strong results in YRI’s high-growth emerging markets with system sales growth of 13%, led by 9% same-store sales growth and a 7% increase in units. Our new unit growth potential in emerging markets is arguably the best in retail. With less than 2 restaurants per 1 million people in the world's 10 largest emerging markets, we know we have a long, long runway for future growth.

We're especially pleased with our sales performance in Russia with system sales growth of 44%, including 32% same-store sales growth, which is the best in our business. Our transition from Rostik's-KFC to standalone KFC is about 90% complete and having a positive impact with our customers as we focus on improving operations and offer compelling value. These results give us even more confidence we can build a strong, profitable business in Russia. Micky Pant, Rick Carucci and I will be traveling to Russia in August and will give you more color on this exciting growth opportunity during our next call.

In Africa, another of our strategic markets, we continue to drive aggressive expansion throughout the continent. By the end of the year, we expect to be in about 20 African countries with tremendous growth potential. The projected population growth in African countries like Nigeria is staggering, and we're establishing market leadership positions with KFC to capitalize on this opportunity. We expect the vast majority of our growth in Africa to be franchise-driven. We acquired 70 restaurants in South Africa last year to establish brand leadership and help drive franchise expansion across the continent.

In Western Europe, our brands are significantly underpenetrated. We continue to believe Europe is a significant long-term growth opportunity. We believe this because our restaurants in France have the highest average unit volumes in the world for KFC. We continue to build our scale in increased television advertising. It's no secret that McDonald's has over 2,600 restaurants and makes over $1 billion in France and Germany alone. We only have 218 KFC restaurants and make less than $30 million, so we know there's substantial room to grow into a major business in the years to come. With that said, we struggled in France in the second quarter with a decline in same-store sales of 4%. We remain confident in our strategy and continue to utilize a franchise business rental model to drive new unit development and returns. We've also taken this approach to Germany, where we have an even higher transactions than France and should have the necessary scale to utilize TV advertising next year.

Clearly, Europe has its challenges, so we expect our third quarter results to be choppy as we go after a much bigger prize for the long term. For YRI overall, operating profit grew 7% in the first half of the year driven by solid sales performance. In the second half of the year, we expect healthy top line growth, improved restaurant margins and less G&A spending versus a year ago to drive improved profit performance.

In the United States, our strategy is to dramatically improve our brand positions, consistency and returns. The good news is we had another great quarter with operating profit up 26%. Taco Bell, our most profitable U.S. brand, led the way with 13% same-store sales growth and the historic launch of Doritos Locos Tacos. We're also excited about the July launch of Cantina Bell with its exciting new ingredients like whole black beans, cilantro, white rice and corn pepper sauce, inspired by celebrity chef Lorena Garcia. This initiative is designed to broaden the appeal of Taco Bell, offering vast casual-type products at 2/3 the price. If you haven't tried these products, you've got to get out and do it. Along with Doritos Locos Tacos, we have made major headway at Taco Bell and are extremely optimistic about the future.

We continue to make progress with First Meal and plan to have breakfast at Taco Bell nationally by 2014. Greg Creed and his dedicated team and our franchisees are totally committed at taking Taco Bell to new heights and have worked very hard to reignite the power of the brand. A couple of weeks ago, I met with the Taco Bell franchisees at the Top to Top Summit, and they are very enthusiastic about where we're heading and are excited about all the quality upgrades and product innovation that we have and are committed to growing this great brand. Now one thing you should recognize is the launch of Doritos Locos Tacos represents one of the biggest breakthroughs in our industry. In fact, innovations like this don't come along very often. So while there's no question Taco Bell is on its way to having an outstanding year and laying the foundation for the future, we're not counting on double-digit same-store sales growth going forward.

Now Pizza Hut delivered another solid quarter of results. Its combination of leveraging value, using its $10 large pizzas and bundling complete meals in $10 and $20 boxes with chicken, breadsticks and desserts, this, along with the traditional Pizza Hut pizza innovation, continues to resonate with our consumers. We've also entered the sandwich category with the P'Zolo and continue to innovate with products like the new garlic bread pizza. Scott Bergren, our Pizza Hut CEO, and his entire team are committed to growth, and I'm confident that Pizza Hut will continue to build on its track record and success and drive consistent growth.

At KFC in the U.S., our business is stabilizing. We're working with our franchisees and profits are improving. Overall, our U.S. business had a strong first half. I'm especially pleased with the strong sales momentum and tremendous innovation at Taco Bell and the sustained growth at Pizza Hut, where we have definitely solved our value equation. I'm confident we're improving our business model in the U.S., but we all understand there's a tremendous amount of work yet to do and we're excited to continue to get after it.

Now let's talk about our India Division, where our brands are all about the youth and providing an aspirational experience for our customers. We have 479 restaurants in our India Division and expect to open over 100 new units this year. Our business model is getting stronger and stronger every day, working in both large and smaller cities. I just returned from India, and I could not be more excited about our growth prospects with 4 brands, KFC, Pizza Hut Casual Dining, Pizza Hut Home Service and Taco Bell. The brand has gone to school on what makes KFC and Pizza Hut so successful in China, and we're applying these strategies to India. Based on the unit economics we're seeing, we believe there's a compelling reason to put even more capital work at KFC in India.

Overall, while we're making substantial progress, we don't anticipate meaningful profit contributions from our India Division for the next couple of years. We are laying the foundation for this business to have a significant impact on Yum!'s profit growth in the future. Just like China, we want to have leading brands in every significant category in India.

In summary, the Yum! business is in very good shape and we look forward to a solid second half and full year EPS growth of at least 12%.

Now let me hand it over to Pat Grismer, our Chief Financial Officer.

Patrick Grismer

Thank you, David. Today, I'm going to comment on our second quarter results and our expectations for the second half of the year. Also, with the step change that we've achieved in new unit growth, I'm going to provide some perspective on how we're building momentum in retail development.

Overall, second quarter financial results were marked by very strong top line performance with a worldwide system sales growth of 8% driving operating profit growth of 7%, excluding the impact of special items and foreign currency. Although EPS was up only 1% on a comparable basis, this was after an expected 10 percentage point impact of lapping last year's unusually low second quarter tax rate of 16.7%.

In China, we delivered our sixth consecutive quarter of double-digit same-store sales growth, an impressive system sales growth of 23%, excluding the impact of our Little Sheep acquisition. This was offset by a 4.1 percentage point decline in restaurant margin and a significant investment in G&A to further extend our unique growth capabilities. For the second quarter and year-to-date, our margin decline in China was driven by persistent high inflation, labor investments to expand our strategic sales layers, like 24-hour operations and delivery and the incremental costs associated with the ramp-up of our restaurant development program.

Our first half margin of 19.1% was about 1 percentage point lower than we had originally expected, largely due to the manner in which we implemented our pricing actions. As Rick explained on our first quarter call, we've recently adopted a more targeted and strategic approach to our pricing in China to drive everyday affordability for the growing consumer class while achieving about 20% margins over time. To that end, our plan included a phased implementation of price increases, as well as an increase in the number of pricing tiers across the country to better match our pricing to trade area-specific purchasing power and operating costs. While we're confident in this approach, it has taken more time to implement than we expected, and coupled with the restaurant labor investments necessary to enable our increased pace of development, has driven margin below our forecast.

Clearly, we're not happy with a 4.1 percentage point margin decline in China even though this is short term. However, our pricing is now in place and we look at the process we've used as a responsible investment in the long-term growth of our business. This approach protects our consumer value proposition, supports an accelerated pace of new restaurant openings and helps us to achieve about 20% margins on a sustainable basis. We believe this is a winning long-term strategy. Later on, I'm going to talk about why we expect our China margin will improve modestly in the second half of the year.

At Yum! Restaurants International, we delivered solid system sales growth of 7% and operating profit growth of 6%, excluding foreign currency translation. Emerging markets continue to be Yum! Restaurants International's growth engine with 9% same-store sales growth and 8% operating profit growth, excluding the impact of foreign currency. In addition to Russia, as David mentioned, we were very happy with the double-digit system sales growth in Latin America, Africa and the Middle East, further demonstrating the strength of our emerging market position. Additionally, over 60% of YRI's new units were opened in emerging markets.

Despite strong sales overall, YRI's restaurant margin was down 1.1 percentage points in the quarter, driven by temporary cost pressures in Thailand and a same-store sales decline in France, partially offset by improved margin performance at Pizza Hut U.K. From a G&A perspective, YRI decided to restructure for stronger field support. We believe this will position us to grow faster in the long term, but we incurred $5 million of one-time costs in the quarter related to this decision.

In the U.S., we had very strong performance from each of our brands with operating profit up 26% in the quarter. I was especially encouraged by the fact that each of our U.S. brands delivered same-store sales, margin and profit growth for the second consecutive quarter. Please note that 26% operating profit growth was after the resolution of a California employment lawsuit at Taco Bell, which resulted in a pretax charge of $17 million in the quarter.

U.S. restaurant margin was a very healthy 17.5% for the quarter, including 19.4% at Taco Bell and 17.8% at Pizza Hut. Our overall increase of 5.8 percentage points over prior year largely resulted from sales leverage, as well as continued progress on supply-chain efficiency. On the latter point, Pizza Hut has led the U.S. system, a recent example being a redesigned pizza box which has not only yielded substantial cost savings, but has reduced environmental impact as well.

Stepping back and looking at the first half of the year, I'm pleased with the overall quality of our growth as 8% system sales growth prior to foreign currency translation converted to 12% operating profit growth, which in turn drove an 11% increase in EPS prior to special items. Demonstrating the power of Yum!'s portfolio, the temporary margin decline in China was offset by a resurgence in our U.S. business led by outstanding performance at Taco Bell, our largest and most profitable U.S. brand.

Now I'm going to talk about our expectations for the second half of the year, when we expect our China and YRI businesses will deliver a larger share of our overall earnings growth. In China, while it took longer than we anticipated, we now have our pricing in place. With the significant reduction in food inflation, we anticipate modest year-over-year margin improvement in the second half breaking the pattern of recent margin declines. This is prior to the inclusion of Little Sheep, which could adversely affect our restaurant margin percentage by about 1 percentage point in the third quarter as hot pot sales are seasonally low in the warmer summer months. This margin improvement, combined with healthy same-store sales growth and continued strength in new unit development, will deliver strong double-digit profit growth for China in the second half of the year.

Looking ahead, we continue to believe our China restaurant margin will sustain around the 20% level over time. Let me take you through the 4 main reasons why we believe this. First, we have the unique ability to grow our business across the entire country with unmatched development resources and a proprietary distribution network. This enables us to increase our mix of higher-margin restaurants located in lower-tier, lower-cost cities, offsetting the lower margins of Tier 1 cities, where rent and labor costs are relatively high. Second, we're growing Pizza Hut Home Service and East Dawning, our emerging brands, which dilute restaurant margin by about 0.5 percentage point today. As we scale these businesses and improve their unit economics, overall margin should benefit. Third, we have potential upside from restaurant productivity initiatives and expect to gain more supply-chain efficiencies over time as we continue to leverage our size. And fourth, we have a strong track record. Consider this: over the past 5 years, our China restaurant margin has averaged a little over 20% with a low of 19% as we drove average unit volumes up by 25% in real terms even as we doubled our restaurant count in an inflationary environment. Taking all these factors together, we're confident that we can achieve and maintain margins of about 20% in China for the foreseeable future.

At YRI, we expect solid sales growth to continue balance of year. We also expect improved margin performance, accelerated net unit development and more moderate G&A growth in the second half. These factors combined set up YRI for stronger profit growth in the back half of the year. We also plan to complete the refranchising of our Pizza Hut U.K. business later this year and expect this transaction to be accretive to earnings going forward.

In the United States, we expect modest profit growth in the third quarter but have a fourth quarter headwind of $18 million as we lapped last year's 53rd week. We expect full year U.S. margin improvement of about 3 percentage points. We also continue to make progress with our refranchising objectives. By the end of this year, we expect our ownership level to be around 5% at Pizza Hut and KFC. We expect to retain a higher ownership level at Taco Bell, but to reduce our current ownership from 22% to about 16% by the end of next year. We believe this will lead to even better results for our shareholders over time. In summary for the full year, we're expecting significant profit growth from each of our divisions, led by strong sales performance across our entire business. And when you add it all together, we expect full year EPS growth of at least 12%, excluding special items.

Now I want to take a minute and talk about the momentum we're building in new unit development. As you know, our ongoing profit growth model is very much new unit-driven. The good news for our shareholders is that our development pipeline and capability have never been stronger. And because of that, we're now projecting a record 1,700 new international units in 2012. With now 1,000 people on our development team in China, we have unparalleled resources and know-how to take our growth to the next level. As David mentioned, we have raised our China development forecast to at least 700 new units which not only extends our position as the largest and fastest-growing retail developer in China, but also expands the first-mover advantage that has underpinned many years of exceptional growth. When you consider that this equates to opening about 2 company-owned restaurants per day with cash paybacks averaging less than 3 years, you can appreciate the shareholder value created by this extraordinary development program.

At YRI, which is about 90% franchised, we expect to open about 900 new restaurants this year, over 60% of which will be opened in high-growth emerging markets. This pace of development demonstrates the attractive investment returns that our restaurants offer and reflects the underlying health of our brands in many parts of the world. In India, we're just getting started and expect to open over 100 new restaurants this year, led by equity investments at KFC, where our investment returns have averaged over 20%. With YRI and India combined, we expect to open a record of at least 1,000 new international restaurants this year outside of China.

Although we tend to focus on our international development opportunity, the fact is that in 2012, we'll also have our highest number of new unit openings in the U.S. since 2002. We've modestly increased net units at Taco Bell for 4 consecutive years and look for the pace of development to increase going forward. At Pizza Hut, 2012 will mark the second consecutive year of net unit growth after a decade of declines as our low-cost delivery carryout units are gaining traction in the system.

Overall, I'm obviously very pleased with our step change in new unit development. As we said before, there are 3 main drivers of shareholder value: new unit development, same-store sales growth and high returns. As CFO, it's comforting to know that a large portion of our EPS growth is in the ground before we even start each year. And with record new unit development expected this year, we've never felt better about our future growth.

David, back to you.

David C. Novak

Thank you very much, Pat. Appreciate it. So in summary, the Yum! business is in very good shape and we look forward to a solid second half and full year EPS growth of at least 12%. So with that, we'll open it up for any questions that you have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of David Palmer.

David Palmer - UBS Investment Bank, Research Division

The reason for that profit shortfall in China, it's not the usual one which we generally anticipate would be sales or maybe a food cost spike. You mentioned some reasons, the slower-than-expected pricing rollout, the accelerated unit development and why the margins were down last quarter more than expected. But obviously, The Street is hearing about these reasons more now after the quarter than we heard before. You're giving some comforting guidance and commentary about your margin opportunities in China for the second half and beyond. But the natural question comes back to Yum!'s forecasting ability for that China Division. Have you thought about that and how you can better anticipate your profit performance and communicate that to The Street going forward?

Richard T. Carucci

All right. David, why don't I take that since I was the one who gave the previous forecast. China is a pretty difficult business to forecast now than compared to, let's say, 5 years ago. If you go back a long time ago, almost all of our profit growth was generated by new unit development. We could count on cost of sales being pretty stable and us getting synergies in that area, et cetera. So we pretty much were able to grow our bottom line with our top line. If you look at it, there are just more moving pieces today. There's higher labor inflation, a lot more volatility on commodities than there used to be. And probably the only thing I think we missed is we may be missed some of the inefficiencies of going from 500 new units a year to 700 new units a year. So I think we did have some teething problems around new unit development and its impact on operations, and perhaps maybe we could have anticipated better. But whenever you have a high company-owned business, China's 90% company-owned or so, you're going to have volatility when you have same-store sales and cost of sales moving. So I think that -- and then you have an uncertain economic situation to look at there. The piece that we sort of anticipated but maybe not the extent of it is we did know sort of a quarter ago that we were going to have pricing impact. And when we started executing that pricing impact, we just stretched it out a little longer than what we thought at that point last year. And that was just sort of an underground decision based on the reactions that we were getting as we were putting that in place. But as Pat said, those are done now. So from a pricing standpoint, we've pretty much done the lion's share of what's going to impact the balance of the year.

Patrick Grismer

And David, the other thing I would add to what Rick has said is that we had effectively guided that margins in the quarter would be down about 3 points. And they were, in fact, down about 4 points, so we missed it by about 1 point. So yes, it was a bit off from what we had indicated. But to Rick's point, the team on the ground is in the best position to read what's happening in the retail environment and to make the right decisions as it relates to how we execute our pricing actions, and then their judgment that made sense and we support them on this to go a little bit slower.

David C. Novak

And just the overall strategy, remember, is that what we want to do is to continue to drive affordable accessibility for the growing consumer class. We thought of -- and that's one of the big things that's been driving us. And what I continually tell the team is keep polishing the diamond, okay? We've got great, great brands there, keep making our brands affordable, make sure we have great operations, make sure the assets looks great and the numbers will take care of themselves. And we obviously take a great deal of pride in doing what we say, and I think we have a very good internal forecasting process. And we try to do the very best job we can guiding. And we were off 1 point in China this quarter. But I'm not going to apologize for that.

Operator

Our next question comes from Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc., Research Division

Ask about the price increases that you're taking in China, given the timing. It seems like there might be a risk, at least in my mind, to traffic trends if you're taking prices when McDonald's seems to me investing in value, local competitors will have more P&L room for promotions. Given last year's food inflation, consumers are perhaps becoming a little more value-conscious over there. Can you talk about maybe some of the early experiences you've had now with the price increases in place and how you mitigate that risk?

Patrick Grismer

Well, Michael, first, as to the extent of pricing that we took, as we said, the pricing was phased in over time. And that was in the low single-digit range, in the range of 3% to 4%. Moreover, the team put a great deal of thought into how and where to take that pricing based on their analysis of purchasing power and cost. And that's why we decided to take it slow. The team is very sensitive to the consumer environment currently and clearly, as David mentioned, is interested in maintaining the strong value position that we offer consumers. So in our judgment, we believe that the amount of pricing that we took was entirely appropriate based on what we've read over time. And so we do not expect that there's going to be an adverse consumer reaction to the amount of pricing that we've recently implemented.

David C. Novak

Yes. The last thing the customer is going to see in China is sticker shock, okay? So I think we've done a very prudent job of managing pricing, and again, with the primary objective of being affordable. And I think that continues to be the case, and we're not really concerned about that.

Operator

Our next question comes from Jason West of Deutsche Bank.

Jason West - Deutsche Bank AG, Research Division

Just another question on China. You talked, David, about a sort of mid-single-digit expectation on the back half of the year. Just if you could give us any color on how things progressed through the quarter, if you're starting to see some signs of stabilization that gives you comfort with that number. Or are you still seeing consumers tighten their belts and it's unclear when things will stop deteriorating there?

David C. Novak

We really don't comment on how we're proceeding during the quarter. I just think that we're very confident in our long-term business model in China. And we think we're making each of our brand stronger this year. And we'll report our numbers out like we always do and not before it.

Patrick Grismer

And Jason, the other thing I would add is that I think it's important to look at our comps on a 2-year basis, right? So as David said in his speech a couple of times, as we enter the back half of the year, we are lapping an extraordinary performance, right? Over the back half of last year, same-store sales were about 20%. So with that said and given how we performed in the first half of the year, we stand by our forecast for balance of year. It's single-digits on average.

Operator

Our next question comes from Jeffrey Bernstein with Barclays.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Just to perhaps shift gears to the U.S. business, a two-part question. First, I was wondering whether you can assess how you view the competitive dynamic. It seems like we're seeing a little bit more aggressive value and promotional activity at a couple of your larger burger peers and others. And even in the pizza segment, we're seeing something similar. So I'm just wondering if you could talk about the landscape as we look to the back half of the year. And then perhaps as an aside, with people pushing value, I'm just wondering whether you can give us an update on the commodity inflation, perhaps for each segment of '12. I know there's obviously been a spike more recently. And I'm just wondering whether you have confidence in your second half outlook, whether there's any volatility to that or whether the risk is more to '13 from a commodity standpoint?

Richard T. Carucci

I'll handle the environment before we get into commodities. I would call the U.S. as sort of in a process of a rocky recovery. So you do see from an industry standpoint, you see sort of a couple of good months and then a bad month and similar from a week-to-week basis. So things are not great and they're not terrible. They're sort of mediocre in terms of the marketplace right now. In terms of our business, I feel pretty good with -- I feel very good about the programs that we have in place. David talked about Pizza Hut, Taco Bell on the call. And if I look at the balance of year for Pizza Hut and KFC in terms of the plans we have in place, I feel good about our ability to be positive in the back part of the year.

Patrick Grismer

And Jeffrey, as to your question on inflation, relative to the guidance we provided in New York on full year inflation for each one of our divisions, based on what is happening in commodity markets, what we're currently forecasting is low single-digits inflation in each one of our divisions. And as we mentioned earlier in our remarks, that's one of the reasons why we're confident that we'll see the modest improvement in margins in China in the back half of the year.

Operator

Our next question comes from Joe Buckley from Bank of America.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Just to follow up on that. So the food cost inflation in China, you're saying the second half of the year will be up low single-digits? Or has it subsided enough as you could see that for the full year?

Patrick Grismer

Yes. More on a full year basis, what we're seeing is low single-digits in China. Certainly, it would be close to flat even in the back half of the year for China, including in the fourth quarter the prospect of some deflation, given that we are lapping very high inflation last year.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then just a couple of other questions on the China margin and some just to clarify what's already said. So do you think the 20% China restaurant-level margin is attainable this year? Or given the shortfall this quarter, will be below that, do you think?

Patrick Grismer

It will be very difficult for us to get to 20% this year because of the decline we experienced in Q2. We see that we're going to be in the 19% to 20% range. It's tough to call at this stage, right? But long-term, no doubt about it, we see our way to 20% on a sustainable basis.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then could you comment on the promotional environment there and if that had any impacts on second quarter margin? Was there more discounting or promotional activity year-over-year?

Patrick Grismer

That was not a big factor in our margin performance in the second quarter.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then just one more on the same topic, and then I'll let somebody else go. So is the pricing now -- you mentioned 3% to 4% pricing. Is the pricing up about 6% or so year-over-year? And when do we roll over or lap some additional pricing? I think there might have been something in September of last year, if I'm not mistaken.

Patrick Grismer

That's correct. Current pricings, including our most recent actions, is on the order of 7%. There were 2 separate actions taken in the fall of last year, one in September, one in November. So those will roll off as we approach the fourth quarter.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. How much for those? Can you share that?

Patrick Grismer

2%.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

2% each [indiscernible]?

Patrick Grismer

Yes.

Operator

Our next question comes from John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

Just first following up on that, if pricing is 7%, at least going into the third quarter, are you assuming traffic is positive in the mid-single-digit mix? Or is that not part of that assumption?

Patrick Grismer

With respect to transactions, given that we are lapping extraordinary traffic growth in the back half of last year, I would say that the traffic growth will be flat to slightly positive. But that is effectively working in our guidance for now back half of year of mid-single-digits same-store sales growth.

John S. Glass - Morgan Stanley, Research Division

Appreciate the clarification. And can you just help us decompose the labor deleverage this quarter? Because wage inflation was less than quarter, and I know you called out some specifics around both the 24-hour initiative, delivery, as well as the new stores. Is there a way to tease out how much of that is from each of those components? And how much of it is one-time and contained in this quarter? And how much is expected be an ongoing phenomena because those initiatives continue?

Patrick Grismer

And John, we normally wouldn't going into that level of detail here. And clearly, it was a contributor to the margin decline in a year-over-year basis. The good news is that we're making this investment to grow these strategic sales layers. So as we roll out more 24-hour operations, as we roll out more delivery in KFC, yes, there's an upfront investment. It's slightly dilutive to our margins. But the important thing is that we're creating the platform for future growth. And also I'm sorry, John, just one last point. As you think about the impact of labor, of course the other big one, which we mentioned on the call, is what happens when you ramp up new unit development. And to the point Rick made before, when you move from a run rate of 500 to 600 new restaurants a year to something north of 700, you have to make an investment in operating capability. And that's been one of the keys to our success in China is that we don't grow ahead of capability. We build the capability first, and then we open the restaurants. And that, what that requires is an investment in restaurant labor so that we have the pipeline of RGMs fully qualified, ready to run these restaurants to our standards.

John S. Glass - Morgan Stanley, Research Division

What is your -- just last question. What is your expectation of Little Sheep dilution to margin for the full year in China? And I presume that your guidance of 19% to 20% excludes that.

Patrick Grismer

That is correct. And thank you for clarifying that. So our guidance on margin excludes the impact of Little Sheep. As we mentioned in the earnings release for the quarter, Little Sheep diluted margins by 0.3%. On a full year basis, in fact it will probably be a bit more than that. I mentioned in my remarks that the impact in Q3 alone could be up to a full percentage point. As to the impact to overall profits, at this stage, we would say that it will have a negligible impact.

Operator

And our next question comes from Andy Barish with Jefferies.

Andrew M. Barish - Jefferies & Company, Inc., Research Division

Just 2 quick updates on some bigger-picture issues. First on FX for the year, just given the dollars spent. And then secondly, with the terrific results out of Taco Bell and the margin numbers, is that -- your refranchising, I guess, is that still moving forward? Or is there some thought maybe you want to keep some more of those assets, given the improved performance?

Patrick Grismer

I'll take those questions in turn. First on foreign exchange. Reflecting back on what we guided in New York, you may recall that at that time, certainly as I think everybody appreciates, given how volatile the global markets had been, it's really tough to forecast these things. I wish I had that kind of forecasting precision. But back in New York, we said that we expected for the full year China to deliver a $40 million ForEx benefit and YRI to present a $10 million ForEx exposure, so a net of $30 million. Based on what we've experienced halfway through the year and we're currently projecting based on forward rates, China, we believe, is going to deliver a benefit of $25 million, so that's down from the $40 million. And YRI, because of what you just mentioned, the situation with the dollar, YRI will present an exposure of $20 million, so a net of only plus $5 million. So we've gone from plus $30 million to plus $5 million. That is working in our current guidance of at least 12% EPS growth. And secondly, on U.S. refranchising, Rick can comment.

Richard T. Carucci

Yes. No change in the plans. As sort of Pat mentioned, the goal is still to have Taco Bell go from roughly 22% to 16% ownership. And we said we'd do that over a 2- to 3-year period. We're on track towards delivering that. We feel very good, as Pat sort of mentioned, that by the end of the year we'll meet the refranchising target for KFC. So we're making good progress along that front.

Operator

Our next question comes from David Tarantino with Robert W. Baird.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Just a couple of questions on China. First, I was wondering if you could maybe give us some perspective on what you're seeing in the consumer environment in general. Are you noticing any behavioral shifts or regional changes in demand? And maybe compare the slowdown that we're experiencing over there to what you've seen previously when the economy softened a bit.

Richard T. Carucci

Why don't I take that just from a historical context and Pat may want to add to it. Is that we always have a hard time in that part of the world, where when China slows down, they still have pretty strong GDP growth by our standards. But to your point that the consumers do get more cautious, so we are starting to see more sales at retailers in China. We probably expect that to continue as we go over time discounting. And we expect probably that could make it necessary to continue to provide the value that David talked about in terms of our approach to China. But the thing that's so -- if you look at consumers -- we do think they're going to get a bit more cautious. The biggest trends that we continue to see, and this was probably a bit magnified in the first part of this year, is Tier 1 cities are growing at a slower rate. And as you look at Tier 1 and Tier 2 and probably coastal cities, because exports appear to be slowing, they'll probably be hit harder. So one thing we feel fortunate about is the new unit development that Pat took us through, we're doing very well -- continue to do very well in Tier 3 through 6 cities. And those are generally performing at a higher rate. And right now, it's also higher same-store sales in those areas.

Patrick Grismer

David, the other thing I would add -- and I'm sure you read the same economic reports that we do. And of course, recently it was announced that GDP in China have slowed from 8.1% to 7.6%. But remarkably, consumer spending rose as a percentage of overall growth from what was 47% of GDP growth last year in the first half to 58% in the first half of this year. So broadly, the extent to which consumer spending is contributing to the growth of the economy is improving and certainly, that works in our favor.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Okay. That's helpful. And then I guess maybe one follow-up related to the step-up in unit growth. Could you maybe just talk about your confidence in ramping up the pace there? And maybe is some of the incremental openings really focused on those Tier 3 through 6 cities? Or is it more broad-based across the country?

Patrick Grismer

Well, as I said in my remarks, we have an extraordinary development team in China that numbers roughly 1,000 people. And that capability is unmatched and is a competitive advantage for us and gives us the ability to drive to a new level of unit development. And as I mentioned, one of the reasons why China G&A is up, I think it's 23% on the quarter, is in part because of the investment, the significant investment we're making in this growth capability. And that gives us a lot of confidence to sustain this high rate of new unit development. As to the distribution of these new units across tiers, over the last few years, and this will continue into the future, we're seeing more of a skewing of our development toward those lower-tiered cities, where we have unique presence and capability. And that works in our advantage, as I mentioned, from a margin perspective because it is in those lower-tier cities that we have more favorable cost structures that allow us to generate higher margins and better returns.

Operator

Next question is from Howard Penney with Hedgeye Management.

Howard W. Penney - Hedgeye Risk Management LLC

I was wondering if you could articulate the thought behind the acceleration and growth in China. Back at the analyst meeting in New York, you sort of articulated the thought process that you would have incremental growth coming from other regions of the world to be able to hit 10%. So is the acceleration in China allowing you to complete that 10% growth rate? Or are there other macro factors or competitive factors that are leading you to accelerate the growth rate in China?

Richard T. Carucci

Well, just going back to December, I think that the biggest thing that occurred was the Chinese economic plan and the infrastructure development getting accelerated. And we talked about those cluster cities. And so a lot of new railroads, airports and then malls associated with those places have been sprouting up, and we've going in into those. And those are probably places that we didn't expect to have a couple of years ago. And then the other big part of the increase has just been, as David talked about, the great performance in Pizza Hut, and Pizza Hut also being able to be successful in the below Tier 2 cities. So those are the 2 biggest drivers that we're leveraging, and that's in -- as you know, if we went back 3 years ago, we wouldn't have anticipated that we would've hit these levels this quickly. And there was some teething pains associated with that from a profit standpoint, but we're obviously delighted that the number was able to reach what it reached so far. So we're not looking forward to accelerate beyond that.

Patrick Grismer

And Howard, just as a reminder, as we mentioned, when you look at our international development outside of China, so taking YRI and India together, we're now projecting gross builds of at least 1,000, which again is a record for Yum!.

Howard W. Penney - Hedgeye Risk Management LLC

And still is the notion that there's an increased competitive presence in China not part of the process?

Richard T. Carucci

Yes. Well, I think that the competitive nature in China is definitely higher in the Tier 1 cities. In the rest of China, I think as I sort of said before or we said on different occasions, I think our competitive position has actually improved because we're getting more and more units into these smaller-tier cities before anybody -- national chains, Chinese or Western, are able to get there. So it's a different dynamic by location. So definitely to your point, Howard, I think the Tier 1 cities and even the Tier 2 cities are starting to get more competitive. But we really haven't seen that in the lower-tiered places.

Howard W. Penney - Hedgeye Risk Management LLC

And will this make it harder for the competition to grow in those lower-tiered cities?

Richard T. Carucci

That's our hope.

Operator

And our next question comes from Bryan Elliott with Raymond James.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

I'd like to move to the labor situation in China. Intrigued with the high rate of wage inflation, I'm wondering if that's doing anything to turnover. Are people being lured away to higher-paying jobs in other fields and turnover's rising, and so replacement and training costs are rising? Or are we able to sustain the historical turnover rates and just having to meet the market on wage increases for existing workers? And also whether it's more difficult to hire maybe potential managers in the high wage inflation environment?

David C. Novak

First of all, I think that the -- our ability to hire and retain talent in China is renowned. I mean, we have outstanding operating capability there. In fact, we've recently created what we call Whampoa. It's our training academy for the entire retail industry. Basically, we're bringing in management recruits out of college, telling them that within 4 years they can become a restaurant general manager, potentially a franchisee inside of our company. And if they want to move on and move into another industry, they can be well trained and perfectly prepared to go into retail, opening up many, many different careers. So we hired thousands of management recruits this past year and we think that our goal with operations is to have KFC be the operating mecca for talent not only for ourselves, but the rest of the industry. Just like, I think historically in marketing, P&G has been the marketing training ground for lots of talent. So we have -- today when you look at our RGMs, 90% of our RGMs are at least college graduates. And we see that number actually edging up over time. The quality of our jobs, the perception of our jobs is very, very high in China. Now consider this, these people are running $1.7 million businesses. They have up to 100 employees, okay? They have huge general manager responsibilities and they're being very competitively paid. And we have a culture that is, I think, very, very highly regarded and respected in the country. One of the things that's interesting, I was in -- I gave a speech in Shanghai at Fudan University. And they had 300 seats. There were 600 people in the auditorium. They were literally packing the aisles and almost sitting on top of each other. And the dean of the business school asked, "How many of you have been to KFC or a Pizza Hut in the last week, okay?" Everybody raised their hand. And our ability to build great brands is very highly respected in China, and so we think -- the thing that I'm most pleased about is that we continue to build operating capability. It's that operating capability that's allowing us to open up all the restaurants and continue to get the great return. So I think the ability to attract and retain talent is probably -- well, we've voiced out our operations was our the biggest competitive advantage and I think it is today, that along with the local team that understands how to really build brands. But the operating capability is something we're very confident and we will never ever take our eyes off of it because we know that people capabilities is the key to getting great returns for the long term.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

How about on the hourly side, crew side?

David C. Novak

We're not seeing any real impact, one way or the other on turnover.

Patrick Grismer

And just to build on that, Brian, one of the things that we -- we think our best part-time laborers in China are college students, and the percentage of college students have actually been rising over time.

David C. Novak

I think over 50% now.

Operator

Our next question comes from Keith Siegner with Crédit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

Goes out to either Pat or Rick. Just one last thing on China margins, just to maybe ask it at a slightly different way. You answered one of the questions or saying maybe one of the things that you missed were inefficiencies of accelerating the pace of unit openings. So just at the highest level, and maybe for 2Q and the full year 2012, what is the basis point impact on China restaurant level margins from that acceleration of unit growth? Like what was the drag on 2Q? And what do you anticipate the full 2012 drag to be from that acceleration?

Patrick Grismer

Yes. Keith, it was about 1 point in the quarter, and that's what we're expecting for the year.

Keith Siegner - Crédit Suisse AG, Research Division

Okay. Even though fourth quarter, you'll start to lap against a really accelerated pace of unit openings last year. I would think the pressure might get a little easier as the year progresses.

Patrick Grismer

I'm not calling it on the quarter in terms of our outlook. But in Q2, the impact was about 1 point. And as we look at the year, we would say it's about 1 point.

Operator

Our next question comes from Mitch Speiser from Buckingham Research.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

On China first, regarding labor, should we just continue -- should we continue to expect double-digit wage rate growth for the foreseeable future?

Patrick Grismer

Yes.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Okay. And just a couple of other questions, most of my China questions have been answered. In the U.S., I think you mentioned modest third quarter profit growth. Can you discuss that? Does it have to do with any change in the top line trend? Or is it more on the cost side? If you can explain that, given a great profit growth quarter in the second quarter.

Richard T. Carucci

Just let me clarify. I was answering a question, I thought, about sales growth, so what I sort of said -- they asked about the environment for sales, and we just sort of said we expect positive sales for the KFC and Pizza Hut brands combined for the balance of the year, that we didn't think the environment is going to cause anything out there. I don't think we gave a profit outlook by quarter.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

I thought in the prepared remarks, it was talking about modest profit growth in the U.S. in the third quarter. Did I misread that?

Patrick Grismer

Yes, that is correct. But when we look at the full back half of the year, given the headwind we're facing with the lap of the 53rd week, we wouldn't say that it's modest for the back half. It's more of a third quarter phenomenon as we expect that the sales growth will temper a bit from what we've seen in the first half of the year, low single-digits.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Okay. And on YRI, in the press release, it mentioned that emerging market comps were up over 9 -- about 9%, which sounds particularly strong. Can you give us a sense -- given that you have given guidance in the other regions, do you expect that emerging market comp growth to continue at a similar rate?

Patrick Grismer

Generally, yes.

Operator

Our next question comes from Sara Senatore with Sanford Bernstein.

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

It sounds like the China topic has been exhausted, so I wanted to ask about YRI and the sort of the company margins expectation for improved performance in the back half. I know you talked about more moderate G&A growth and accelerated net unit development. And I can see why that should support faster growth. But can you just talk a little bit about what exactly went on with the restaurant margins? And is the expectation that things get better, does that embed the fact that the refranchising the U.K. business would automatically just give you back, I think, 200 basis points to margins?

Patrick Grismer

Yes. Sara, first to clarify, our forecast of improved margins for YRI in the back half of the year does not assume the benefit of the Pizza Hut U.K. refranchising. When we complete that transaction, as you mentioned, we expect about a 200 basis point improvement to YRI's margins overall. As to why we believe the situation is going to improve, it's important to recognize that in the second quarter, a key contributor to the decline was that we had a spike, a temporary spike in costs in Thailand at a time we were lapping quite extraordinary margins on Thailand. Thailand margins overall are very good, but it just so happens that given the timing of certain expenses including an increase in some wage rates that we took more of a hit in the second quarter. We see the situation for YRI overall in the back half of the year moderating where there's less pressure from unusual cost increases like this. That, combined with ongoing momentum in our productivity initiatives and what we expect we will see from same-store sales leverage, leads us to have confidence that we'll see an improved margin performance from YRI in the back half of the year.

Operator

Your final question comes from the line of John Ivankoe with JPMorgan.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

David, you said something interesting in an answer to your question about a manager potentially becoming a franchisee in China. I mean could you, I mean, elaborate a little bit that on what you meant? And secondly on a completely different direction, the credit markets seem to be in very, very good shape for a company like yours. And your debt to EBITDA and debt to free cash flow are at levels that probably people couldn't have imagined 10 years ago. So kind of looking at opportunities that may be presenting themselves, you have your new CFO, maybe have some different ideas in terms of what the capital structure could be, to what extent could you use the debt side of the balance sheet to enhance equity returns?

David C. Novak

Let me talk about first about the China franchise -- well first of all, in China, we are and will continue be predominantly company-owned. However, we are doing franchising on a limited basis and we're doing it more on a single-store owner basis, and we've been -- one of the things that we've been experimenting with and executing to a certain extent is taking great restaurant operators in our company and giving them the opportunity to run restaurants in China. So we think that, that will continue to be the case as we get bigger and bigger and bigger, especially across the number of different concept areas that we're in. And I'll turn to my new CFO to give you some perspective on our capital structure.

Patrick Grismer

And as to our capital structure, I would say that we're happy with where we're at now and how we've managed it over time because we've gotten extraordinary results. We continue to take a look at what's happening in the market and what might make sense for us and for our shareholders. And so we'll continue to do that and apply the same good discipline we have for the last several years. So no changes anticipated at this stage, but we do continue to look at it.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And if I may ask a question, like why wouldn't there be more debt on -- I mean, just asking a little bit, being more directly, why wouldn't there be more debt on your balance sheet at this point?

Tim Jerzyk

John, you've got to keep in mind, we talked about this. You've got to keep in mind everyday when we're building basically 2 new stores a day in China, most of them -- virtually all of them are leased. So we're adding leverage to our balance sheet in the minds of the rating agencies every day. So you got to keep -- they look at it from the full perspective, they capitalize the leases. So when you look at that, you've got to keep that in mind even though the balance sheet debt may look low, they definitely take that into account. And as we said previously, we had -- we were BBB- .And I think we're still BBB- with one of the agencies. We want to be BBB solid after the financial crisis. We felt like having another little bit more margin of safety was important. And that's basically where we are kind of but we're not quite yet with all 3 of them. So as much as some people would like us to add debt, we feel good about where we are, given what we've learned over the last few years, as Pat said.

David C. Novak

I think the important point here that you bring up, which we take a great deal of pride in, is that we are a dramatically different company, as you point out, than we were 10 years ago and that we have the ability to invest tremendously behind the core growth of our business, which is our #1 priority. We are able to buy back stock and we're able to pay a good dividend. And our ability to do all 3 of those things has only gotten better. And I think that's what I think is exciting as we think about the tremendous growth prospects we have ahead.

Okay. With that, I'd like to wrap it up, thank all of you for being on the call. As I said before, and I think it's a good summary of where we've been. The Yum! business is in very good shape, and we look forward to a solid second half and a full year EPS growth of at least 12%. So thank you very much. Appreciate it.

Operator

And this does conclude today's conference call. Thanks for your participation. You may now disconnect.

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