Yum! Q1 2008 Earnings Call Transcript

 |  About: Yum! Brands, Inc. (YUM)
by: SA Transcripts


Good morning. My name is Carrie and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter conference call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Tim Jerzyk, Senior Vice President of Investor Relations and Treasurer. Thank you, Mr. Jerzyk. Please begin your conference.

Tim Jerzyk

Thank you, Carrie. Good morning, everyone. 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 at 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 the call remains in the active portion of the company’s website at www.yum.com.

In addition, we would like you to please be aware of three upcoming Yum! investor events. Monday and Tuesday, May 5th, 6th this year we will host an analyst/investor conference in our headquarters here in Louisville. Please notify us as soon as you can if you plan to attend this big event.

Our second quarter earnings release will be Wednesday, July 16th after the market close and then finally, we wanted to remind you of our China investor event this year in Shanghai, September 22nd and 23rd, a little bit later this year. If you plan to attend, we would love to have you make plans now to obtain your official visa.

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 will turn the call over to David Novak.

David C. Novak

Thank you, Tim and good morning, everybody. As you may have seen from our release last night, we reported outstanding first quarter results both in terms of operating profit and EPS growth. Our results continue to be driven by great performances from our two big international businesses, China and Yum! Restaurants International, which includes our business outside of China and the United States.

Our high return rapid growth China division had 3% growth in operating profit this quarter, and YRI grew operating profit by 18%. Importantly, these results were built on top of strong year-ago performances, a testimony to the strength of each of these businesses.

In the U.S., while we had to weather substantial commodity inflation this quarter, we are making progress and are in the early days of our U.S. brands transformations. Same-store sales grew by 3%, reversing last year’s decline. Overall for Q1 before special items operating profit grew by 13% and EPS by 19%. Including special items, our EPS grew by 43%.

In our release last night, we took extra care to explain these items so that you could understand our underlying global performance for the quarter. Any way you look at it, however, our aggregate operating performance was very strong in the first quarter.

I am happy to report that on the strength of this opening quarter, we are confident of continued growth for Yum! and its shareholders in 2008, which is why we are revising upward our previous 2008 earnings per share guidance to $1.87, or 11% growth excluding special items, reaffirming our annual commitment to deliver EPS growth of at least 10% every year.

This would be our seventh straight year of meeting and exceeding this annual EPS growth commitment and building on a track record of consistency we are very proud to report to our shareholders.

We just returned from a regular strategic review of our businesses last week and I must say that I have never been more confident of our businesses and their long-term direction. From exciting new growth initiatives at YRI to the brand transformations that we are planning in the U.S., let me now go into some more detail.

As we talk about each of our businesses, we will do so in the context of our four key growth strategies. Number one, build leading brands in China in every significant category; two, drive aggressive international expansion and build strong brands everywhere; three, dramatically improve U.S. brand positions, consistency, and returns; and four, drive industry leading long-term shareholder and franchisee value.

So we’ll start with China, where we are well on our way to building leading brands in every significant category. Same-store sales growth of 12% for Mainland China was one of the best quarterly performances ever, despite historic snowstorms that were widely reported.

At the same time, we continue to strengthen our leadership position with very strong unit growth of 20%. Importantly, we expect to reach 3,000 restaurants on the ground in more than 500 cities in this mega-market by the end of the year. This is a phenomenal result and speaks to the power of our superior brand positioning and execution in China.

For KFC, we expect to again add over 300 new units in Mainland China in 2008, while at the same time driving excellent same-store sales growth and performance. Our brand measures and returns remain very strong and we expect KFC to continue to strengthen its QSR leadership position in 2008 through the development of new proteins, delivery, and the expansion of our breakfast day part.

KFC's pipeline is definitely full with exciting new product ideas we will announce as the year progresses.

Our leadership position also continues to build for Pizza Hut casual dining. Now with over 360 restaurants and growing rapidly, we are the undisputed leader in Mainland China’s western casual dining category. We expect to open about 85 new restaurants in 2008 while at the same time expanding our tea time day part business and bringing exciting menu innovation to our customers.

Our new growth brand, Pizza Hut home service, continues to perform well. By year-end, we expect to add about 20 new Pizza Hut home service units, bringing our total to about 80. Home service delivery is a rapid emerging growth area of the Mainland China restaurant industry.

And finally, we continue to make great progress with our fourth emerging growth brand, East Dawning, our Chinese fast food concept. We are continuing to expand in Shanghai and expect to open three new units in Beijing during 2008 in our quest to make this ultimately China’s number one Chinese fast food brand.

For those of you who have followed our successes over the years in China, you know we have a huge strategic advantage with our stable and experienced management team in Shanghai, our established and state-of-the-art distribution system, our dedicated manufacturing capability, and our large scale development team, all of which combine to produce results that are unmatched by anyone in Mainland China.

With that, I would like to take this moment to congratulate Sam Su, President of our China division, on his election as Vice Chairman to our board of directors. Sam is the preeminent pioneer of our booming restaurant category in the world’s fastest growing economy. He is passionate about China and our China business. He is doing an outstanding job building leading brands in China in every significant restaurant category, which is our number one growth strategy. His strong leadership, restaurant know-how, and local knowledge has and will continue to deliver breakthrough results with his sensational team. Congratulations, Sam and congratulations to everybody in China for the great work that they are doing.

Now on to YRI, where Graham Allan and his team are driving our strategy of aggressive international expansion and building strong brands everywhere. As I noted earlier, Yum! Restaurants International had another really good quarter with operating profit growth of 18%, driven by 15% growth in system sales. Importantly, YRI continues to build on strong performances each year and this quarter is another great example of the sustaining growth this business can consistently produce.

The key driver underlying YRI’s profit growth is the worldwide development capability of our 700-plus franchisees. We opened 158 new restaurants in the first quarter, which is ahead of last year’s pace and we are on track for another new unit development record in 2008.

YRI same-store sales growth in Q1 was impressive with 5% growth lapping a very strong 7% growth a year ago. This performance is especially remarkable given the pace of our new unit development and speaks to our strong competitive positioning, led by our YRI teams worldwide.

A key driver of this performance is continued strong performance in our franchise business units around the globe, including the Middle East, Asia, and South Africa. For the long-term, we also continue to develop in emerging key markets like India, Russia, and even Vietnam as we leverage our core strategic advantage and capability to develop global markets.

As a matter of fact, I visited Vietnam last month and this market has a very similar profile to our China business, with just only 85 million people. It is early days there and yet we are making very good progress with KFC. We have now 40 KFCs and we are also beginning to open up Pizza Huts. Just in the short time I was there, just a couple of days, you could sense the excitement our team members and our customers have for our brands.

Looking longer term at the base business, last week at our YRI strategy review, the team took us through their initiatives to develop permanent sales layers for KFC around the world. For example, we are actively testing global solutions for new beverages in Australia, breakfast in the U.K. and Asia, and new proteins in Latin America and the Middle East. Specifically, we are targeting fish.

We are excited about these opportunities and what they do to build an even bigger KFC brand for YRI. It also shows our innovation capability as we have different parts of the world pioneering new ways that we can take our brands to higher heights.

Give the scope of our global opportunities, we are not satisfied or stopping there. The YRI team remains committed to developing Taco Bell into our third global mega-brand over the long-term based on successful expansion in Guatemala, Costa Rica, and the Philippines. For 2008 and 2009, we will expand our tests beyond to Mexico, Dubai, India, and Spain.

To summarize, we are confident YRI will have another great year in 2008, likely exceeding our at least 5% growth target for system sales on a local currency basis and well over 750 new restaurant openings and drive 10% operating profit growth. Stay tuned for more great news from YRI.

In our U.S. business, first quarter system same-store sales increased by 3%, reversing last year’s decline. Operating profit was down 5%, primarily as a result of substantial commodity inflation.

Q1 was a challenging start to the year on the cost side, yet we are continuing to strive to achieve our 5% profit growth target for the full year. We are very focused on the long-term work that needs to be done to accomplish the U.S. brand transformation strategy we have set in motion. We are confident that we are taking the right steps to lead us to stronger brand positioning, higher returns, and consistent growth performance to unlock the value that’s inherent in our 18,000 U.S. traditional stores, which all of this happens to be our major strategy, our third key strategy for Yum!.

Now let’s briefly review the progress we have made thus far in each of our leading brands.

At Taco Bell, the good news is that we are building strong momentum in early 2008 even with limited news thus far. We will begin to see the introduction of new sales layer ideas in the second quarter with the launch of Frutista Freeze, a new beverage line for Taco Bell. In addition, we will simultaneously launch what we believe will be an enhancement to our already strong QSR value position, with a new, successfully test value menu call Why Pay More?.

What makes all of this exciting is that we will be utilizing a new, multi-layer marketing approach throughout the year to drive trial and build awareness on the new ideas while we maintain multiple messages behind key products and layers throughout the year.

As an example, as we look ahead Taco Bell advertising will have multiple media messages supporting the launch of Frutista Freeze and our new Why Pay More? value initiative while also continuing to build awareness of Fresco, our great taste, less fat, and lower calories line of products through a combination of print and online advertising.

So in summary, we are regaining our edge at Taco Bell and expect to achieve very good results in 2008 as we launch two completely new menu platforms in the second quarter, beverages and our Why Pay More? value proposition, which we expect will build momentum into the second half of the year.

To update you on Pizza Hut, we are in the process of a major reinvention of the brand and delivery category as we drive aggressively against the vision of our Pizza Hut brand providing America with pizza, pasta, and chicken.

We have just successfully launched an exciting new platform call Tuscany Pastas. We launched with two pasta options, Cheesy Chicken Alfredo and Meaty Marinara, as our two core products, both at a great value for families looking for an alternative yet affordable break from weekday kitchen duty. It is early but we are optimistic this will be an important sales layer for Pizza Hut.

Combined with the successful earlier launch of Pizza Mia, which is targeted at the heart of the value category in pizza, we believe we now have two very good options for our customers when they are seeking great value alternatives to everyday dinner solutions. We will be adding more pasta variety later this year to go along with our category leading pizza innovation and our new everyday core value offering with Pizza Mia.

Additionally, we are beginning to gain solid momentum with the rollout of Wing Street conversions, which provides a great branded line of flavored chicken wings and protein variety to our menu. We’ve reached an agreement with our franchisees to dramatically expand Wing Street into our existing Pizza Huts, and by the end of 2009, we will be in position to advertise America’s largest wing chain on national television.

We now have more than 1,200 U.S. Pizza Hut locations which have added Wing Street products to their menu.

In summary for Pizza Hut, we have introduced two new sales layers -- everyday value with our new Pizza Mia, and home meal replacement variety with our new line of Tuscany Pastas and we continued the expansion into our Pizza Hut stores with Wing Street.

By adding and building these sales layers, we remain confident of our ability to grow our Pizza Hut brand in the U.S. within a very challenging category and we are confident in the actions we are taking to transform Pizza Hut into a home meal replacement business.

At KFC, we are continuing to work towards our goal of offering a new range of grilled and portable products any way you want it, alongside our traditional delicious fried chicken. We are in the very early stages of this work. The key event will be the introduction of our new grilled chicken product in the first half of 2009. We will be installing new ovens and back-of-the-house equipment beginning later this year, which will enable our new vision for the KFC U.S. business. We are excited about the new options this will provide our customers going into 2009.

As an initial step into expanding our portability options, we just recently introduced a great tasting, value priced toasted chicken wrap and we will follow this up with the introduction of another grilled portable product later in the year to begin the long-term process of building a much broader offering for lunch customers and contemporizing the brand.

In summary, we are not as far along with our transformational efforts at KFC as we are at Taco Bell and Pizza Hut. You will likely not see national launches of our sales layer building ideas during 2008. We are laying an important long-term foundation for the future success of KFC U.S., have significant testing underway right now and expect to deliver better results in 2009 in the United States for the KFC brand.

To summarize the U.S. business, given the macro environment and an economy we describe as value driven for 2008, Taco Bell is clearly our best-positioned U.S. brand with its number one value rating in the industry and it’s entry level QSR pricing for individual eating occasions.

KFC and Pizza Hut are both more skewed to dinner occasions and higher guest checks. As a result, they are more susceptible to the pressures currently impacting consumer discretionary spending. However, we believe that we are faring well given the environment and we expect to meet our full year target for U.S. sales growth.

Most importantly, however, we are making steady progress in developing a broader range of customer options which we believe will strengthen our brand positionings and lead to more consistent growth performance at each one of our brands.

Our fourth and final growth strategy is to drive industry-leading long-term shareholder and franchisee value. The good news is that we are already a leader in returns not only among restaurant companies but among large cap global consumer companies as well. On an after-tax basis, our return on invested capital is 18%, so we are starting from a position of real strength.

The fact is that Yum! Brands is an incredible cash machine with each of our three businesses generating free cash flow, effectively funding their own capital investments. As this capital is deployed to high return opportunities, for example, our new restaurants in China where the cash payback has been only two years, we expect our total returns to remain strong. These returns will improve further as we continue to refranchise restaurants in the U.S. and YRI.

Along these lines, it is interesting to note that we successfully divested our minority interest in the KFC Japan joint venture which has produced over $1 million in cash proceeds and gains, as well as 100% franchise operation in Japan, which was our long-term objective and certainly improves our returns.

With our strong cash flow and balance sheet, I am also pleased to report that we completed nearly $1 billion of share repurchases in the first quarter when we had a great opportunity to add shareholder value given the market.

This new quarterly record demonstrates our commitment to shareholder payouts, adding shareholder value whenever we can and the confidence we have in the growth potential and the value of our company.

We are proud of the fact that we are one of the few companies that can make significant capital investments year after year and make great investments in large scale share buy-backs while adding shareholder value and pay a meaningful dividend and grow EPS in the double-digit range.

Our commitment is to continue this tradition of rewarding our shareholders with superior returns. For more on our financial performance and outlook, I will turn it over to Rick Carucci, our Chief Financial Officer. Rick

Richard T. Carucci

Thank you, David and good morning, everyone. In this section of the call, I am going to comment on three items: one, Yum!'s first quarter results; two, an update on our U.S. refranchising program; and three, our current year outlook.

Starting with our first quarter results, I would like to highlight three foundations of Yum!'s financial story -- our consistency of results, our global growth, and our strong cash generation.

First, our first quarter results demonstrate that we are well on our way for the seventh straight year to meeting our commitment to deliver EPS growth of at least 10%. As David mentioned, we are very proud of this consistent financial performance.

Second, we continue to expand our business around the world, opening 253 new units in Q1 outside the U.S. This early pace of development gives us confidence that we will again exceed our annual international development target of at least 1,000 new units. Consistent and significant unit growth continues to be a critical component of our global growth picture.

And third, we returned a record $1.1 billion to our shareholders in the first quarter. Share repurchases alone were nearly $1 billion. The average price of share repurchases in the first quarter was $35.39, which we believe has created significant value for our shareholders. We are well on our way toward repurchasing our target of $4 billion of stock in 2008 and 2009 combined. This will reduce our share count by approximately 20% from 2007 levels.

Now I would like to comment on the first quarter results of our key businesses. First our China division had another impressive quarter. Top line growth was led by exceptionally strong same-store sales growth of 12% in Mainland China and impressive new unit growth. In fact, in Mainland China alone, we opened 88 new units, which is ahead of last year’s record pace for the same time period.

While restaurant margins declined by 1.6 points from prior year due to unusually high commodity inflation, they were still maintained at a very healthy 21.3%. This led to 23% constant currency profit growth, lapping comparable growth of 26% last year. This profit growth was achieved while also increasing our P&L investments in future growth engines like Pizza Hut home service and East Dawning.

Additionally, as highlighted in our earnings release, we realized a first quarter profit benefit of $8 million due to favorable foreign currency conversion.

These China results underscore the tremendously strong competitive position we enjoy in this rapidly expanding market.

Yum! Restaurant International delivered another strong quarter. Profits were up 11% on a constant currency basis, lapping 23% growth in 2007. Like China, YRI generated strong top line results through 5% same-store sales growth and through opening 158 restaurants in the quarter.

Given the strong development start in China and YRI, it is very possible that Yum! will exceed the record for new unit openings set last year. YRI results are even more impressive when you consider the significant impact of losing our value-added tax exemption in Mexico. Absent this impact, YRI would have delivered profit growth of approximately 15% on a constant currency basis.

Additionally, due to favorable impact of foreign currency conversion, we realized a profit upside of $7 million in the quarter.

Ultimately, it is our established presence in a multitude of growing markets combined with our franchise business model that makes YRI a unique part of Yum!'s overall growth story.

U.S. results were significantly challenged by cost inflation, as David noted. Our system same-store sales growth of 3% in the first quarter was in line with our full year targets; however, this level of sales could not offset the impact of record level commodity inflation, which along eroded restaurant margins by 2.5 points in the quarter.

Commodity inflation, combined with the lap of Hurricane Katrina related insurance benefits from last year, led to a profit decline of 5% in quarter one. We expect dramatically better results in the back half of the year as pricing actions catch up with cost inflation, and as David noted, we continue to have confidence in the steps our brands are taking in the near-term to transform our U.S. business for the long-term.

As outlined in the earnings release, we have segmented our EPS reporting into reported EPS and EPS excluding special items. We want to make clear that EPS excluding special items is a better indication of Yum!'s underlying performance. These special items include significant U.S. refranchising gains and losses, cost of transformational investment to reposition our brands with new sales layers, and cost of restructuring our business.

In the first quarter the category of special items included $32 million of U.S. refranchising pretax losses and charges related to U.S. restructuring, partially offsetting a $1 million pretax gain from the sale of our minority interest in KFC Japan. Although clearly one-time in nature, this gain unlocked substantial value for our company and was a positive example of the financial discipline we use in making ownership decisions.

When exclude the resulting $0.08 of EPS net gain from our reported EPS of $0.50, we arrive at adjusted EPS of $0.42, or 19% growth on a comparable basis versus last year.

And now for a brief update of U.S. refranchising -- we announced in December that we intend to reduce our U.S. ownership to potentially reach below 10% by the end of 2010. First quarter refranchising was slow and recent tightening in the credit markets may challenge the 2008 pace of this activity. However, we have a significant pipeline of deals and expect future quarters activity to be much stronger than we experienced in the first quarter.

Although it is difficult to predict the exact timing of refranchising, we expect to sell about 200 units in the second quarter and to refranchise at least 500 units during 2008.

Our strategy continues to be to find the best buyers and to realize the best value for our assets and we are under no pressure to compromise either one of these objectives. This has always been a three-year program and we are still on track to achieve our goals. These goals include positive financial benefits to U.S. restaurant margin, operating margin, and Yum! ROIC, as well as less demand on capital expenditures from the U.S. business.

With the first quarter now completed, let’s quickly cover our 2008 outlook. As previously disclosed, quarterly earnings will be volatile due to timing of special items and our quarterly tax rate. That said, we expect our overall business to deliver solid operating performance in every quarter this year.

Starting with the second quarter, I want to point out three things. First, we expect within the special items category a net loss of $0.01 to $0.03 per share due to U.S. restructuring charges and refranchising losses. Second, our quarterly tax rate is likely to be significantly higher than the 21.5% we reported in Q2 of 2007. Third, our U.S. insurance expenses are expected to be significantly unfavorable to 2007 as we lap upsides from last year.

We expect the year-over-year negative impact in the second quarter to be about $20 million. These items will combine to negatively impact our reported Q2 earnings comparison versus prior year. As usual, we’ll explain the impact of key items in our Q2 earnings release in order to clarify the underlying performance of our business.

As David mentioned, on the back of the strong first quarter, we have raised our full year EPS growth forecast to $1.93 on a reported basis, or $1.87 when we exclude special items. This forecast assumes the following: over-performance by our China and YRI divisions when compared to their long-term operating profit targets of 20% and 10% respectively. This over-performance reflects both our very strong year-to-date results, as well as benefits from foreign currency translation.

Potential for slight underperformance by our U.S. business when compared to its long-term operating profit growth target of 5% based on weakness in our quarter one operating performance. We expect U.S. profit performance to improve in the second half of the year as our pricing actions catch up with commodity inflation.

To wrap up, we are very pleased with our overall first quarter results and we expect 2008 to be another successful financial year for our shareholders, generating consistent financial performance, impressive global growth, and strong cash flow.

Back to you, David.

David C. Novak

Okay, thank you very much, Rick. You can see I think from our comments that we’ve gotten off to a strong start in 2008. By the way, we actually had a $100 million gain in Japan, not a $1 million gain, as Rick was going through the numbers there. Small little detail there but anyway, we are truly in a unique position as a global growth company to be able to turn in the kind of results that we generated in a very challenging environment. With the huge market opportunities in China and the sustaining growth of YRI’s huge franchise fee base, we are able to whether difficult storms and continually demonstrate the power of our portfolio.

The U.S. is clearly our most competitive market and our biggest opportunity to improve performance. Over time having a portfolio of three big leading brands in the U.S. has provided a good deal of stability to our U.S. profit and cash flow performance and we are taking action to make it a stronger growth contributor to supplement our powerful global business as we go forward.

With all that said, you can expect 2008 that Yum! Brands will once again differentiate itself as not your ordinary restaurant company and I am particularly pleased that we will once again exceed our at least 10% EPS earnings target.

With that, we’ll open it up for any questions that you may have.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Joe Buckley with Bear Stearns.

Joe Buckley - Bear Stearns

Thank you. Good morning. A question on the KFC Japan transaction, not on the $100 million gain but what income statement items change as a result of that? I think the release mentions and the 10-K mentions the equity income number goes down but your franchise revenues go up. And net net, is that a -- you know, on a year-over-year basis did the first quarter benefit from that transaction in terms of the operating income numbers at YRI?

Tim Jerzyk

Actually, the primary impact to the P&L is the loss of the minority income. Our portion o the income from the overall business that we reported in other income within the YRI P&L. It’s a -- it was a relatively minor amount of money, so that’s gone. So in terms of operating profit, there is a small loss from that line item. The franchise side stays the same. The Japanese business pays royalties as a franchise business, as it did before.

Joe Buckley - Bear Stearns

Okay, and then a question on China -- the same-store sales performance is very, very strong again and just curious your perspective on it, how much of that is price? Do you think you are gaining share because your prices are going up less than overall food cost inflation? And how do you think about it as showing some aspects of a boom like environment -- and whenever I say boom I always think bust, so just worried about the potential risk going down the road if that’s the case.

Richard T. Carucci

Well Joe, clearly the economy in China is extremely strong and we are benefiting from that and our strong position there.

Regarding inflation, again we’ve had more inflation than most because of the chicken costs that we’ve talked about historically. Those are continuing at high levels in 2008, at least through September this year.

We took pricing last year and for a full year basis, around 7%, 8% range and we took modest pricing the beginning, sort of about a month or so ago. Having said that, those prices combined are less than the commodity inflation that is being caused by chicken, so that’s why our margins are down a little bit and obviously the transaction growth that we’ve been getting has been able to offset that and still allow us to exceed our profit picture.

Regarding the balance of the economy going forward, again not an economist but I would say the China track record has been pretty consistent over not a few years but a 10-year period of growing double-digit economic growth and I personally expect that to continue.

David C. Novak

I think I read something yesterday, Joe, you know, you see all these statistics, but there is now more Internet users in China than there is in the United States, I think $212 million. And we only have now -- we’re going to be 3,000 restaurants, so we have 18,000 in the U.S., so there is plenty of runway for us in terms of opening up a lot more restaurants with an economy that is quickly getting to be as large as the U.S.’

And then I think the other thing that is interesting, we are really in early days in developing the concept. We continually talk about our China business to be similar to what the McDonald’s business is here in the U.S., where they have 14,000 units but right now, breakfast is only 5% to 6% of our mix. We are also just expanding home delivery at KFC, which we can do because drive-thru is not a big deal in China because of the density of the locations. So we are having great success with adding home delivery.

As the automobile market does develop, we are adding drive-thrus and that will be another opportunity for us as we go forward and those types of locations. But when we look at the growth that we are having, the economy obviously growing at least 10% has been a big driver for everybody there that has a strong franchise. But the thing that’s really exciting for us is just the brand dynamics that we have for KFC are so powerful and that we are getting that young consumer, not just families and kids but we are getting that 16 to 24 young adult and that group is getting more and more disposable income. And that’s only going to get better as we go down the road.

So yeah, we don’t expect every quarter to be like what we just had in China and every year to be a boom year, but like I always say, we are going to be very happy that we are there and with the kind of presence that we have.

And Pizza Hut, same thing. Pizza Hut we’ve got -- we’re having great success with Pizza Hut. We’re expanding the day part there. We’ve created a tea time there which not only gets us into desserts and teas but also we are building a significant coffee business and we actually have a competitive advantage versus Starbucks because our environment and experience there is actually superior.

So we think we are well-positioned there to take advantage of the growth in that category and obviously we are working hard to develop Pizza Hut home service and East Dawning.

I think we’ve got enough fires, enough irons in the fire to give us some pretty good optimism that while we may not have the kind of robust growth that we have going on right now, the booms are becoming less and less likely -- or the busts are becoming less and less likely.

Joe Buckley - Bear Stearns

I appreciate those thoughts. Just one more question -- the 12% same-store sales growth, how would that break down then between check and traffic?

Tim Jerzyk

It will be in the Q, the final details, Joe, but roughly pricing I believe was in the seven-ish kind of range, mix was like two or three points on top of that and the rest was transaction growth.

Joe Buckley - Bear Stearns

Okay. Thank you.


Your next question comes from David Palmer with UBS.

David Palmer - UBS

Thanks. It appeared that Taco Bell was really the horse that drove comps in 1Q and is it really the basic view as you look through ’08 that the same-store sales growth from that chain is really going to continue to drive the overall blended number and that these menu introductions, the beverages and the value-oriented innovation, are going to basically offset the tougher comparisons that you have for the balance of the year for Taco Bell?

David C. Novak

I think first of all, we expect Taco Bell to have a very strong year, as we’ve talked about. We are also optimistic about what is going on with both Pizza Hut and KFC. Our goal is to get all of them going and that’s really what our focus is and where we are headed.

And I think that as we pointed out in the comments, this is a challenging environment right now in the U.S. It’s a very value-driven economy and what we are doing is we are taking very active steps to get ourselves well-positioned there on two fronts; making sure we have value propositions that are better than they have ever been at each one of our brands and also leveraging the assets.

And the thing that I am most excited about that we have going on are the things that, you know, like this upcoming launch of Frutista beverages at Taco Bell. That gets us into an incremental occasion with frozen beverages and we’ve got an exciting long-term vision to really get after that as we go forward.

The other thing at Taco Bell that we feel good about is we are strengthening our everyday value proposition where we already are number one in the industry but we will be launching this Why Pay More? menu that we think gives us the best amount of food for the money offering that there is in the industry. And you’ll get to test that for yourself when it’s launched within the next month.

So yeah, you’re right -- we do expect Taco Bell to carry a lot of the load this year and we also recognize that KFC and Pizza Hut are in tougher markets right now, because Taco Bell is driven primarily from that low-end individual eater transaction, the guest check is a lot lower. Whereas KFC and Pizza Hut are in the -- more on the dinner occasion, which as you know is under much more pressure with the consumers discretionary spending.

But having said that, I would like all of you on the call to go out and try our new pastas, because we just launched Tuscany Pastas, which are being very well-received and this is all along our -- what I talked about at the analyst meeting. We are going to start leveraging the brand, leveraging our asset. We’ve now got a new alternative meal that we think is going to help stimulate Pizza Hut sales and profits and also early week volume, because mom is really looking for another -- mom and dad are looking for another home meal replacement option. We’ve got one with pasta and with originally these two items that we just launched. There will be more coming down the path.

And you know, we’ve got chicken. Chicken is really, really beginning to take off at Pizza Hut. I talked to our Pizza Hut franchisees. They are excited about Wing Street now and we are going to make that a national brand, so Pizza Hut is being transformed -- not just pizza; it’s pizza, pasta, and chicken.

And then KFC, I think to your comments, David, has the most challenging year of all this year but we are doing a lot of things to set up 2009 to be a strong year for us as we get ready to launch Kentucky Grilled Chicken, get our portable meal platform, or portable item platform more established. The launch of the toasted wrap at $1.29 was the beginning of that but we are developing a number of products that will go into that stable that will help us get more of the lunch occasion. As we get better and better and dinner by having non-fried and in fact, we think having chicken any way you want it, fried and non-fried, will really give us a longer term growth opportunity at KFC that people can’t see right now, and I understand that.

So I am very enthused that what I talked about in October or excuse me in December at the analyst meeting in terms of the potential we have to unlock the value in the U.S. business is -- the brand transformation strategy is on track and I think you will see more and more evidence of that as we go forward.

But this year, make no mistake about it -- China and YRI are going to be the big growth drivers of our company but that’s been true for the past few years.

David Palmer - UBS

Thanks. I’ll leave it there.

Tim Jerzyk

Thanks, David. Next question, please.


Your next question comes from Jeffrey Bernstein with Lehman Brothers.

Jeffrey Bernstein - Lehman Brothers

Thank you. Actually, just a couple of follow-up questions, first on you were talking about the U.S. comps turning positive. I’m just wondering if you can give any color on either trends by brand or sequential throughout the quarter, perhaps some regional discussion on strength and weakness.

And then more broadly speaking, it seems like despite the comp lift, obviously the commodity cost pressures hurt the margins. I’m just wondering what type of life you think you might need to maintain the margins, perhaps with the margin outlook for ’08. I know you mentioned some pricing action in the second half of ’08. Just looking for some detail on that front. Thanks.

Richard T. Carucci

We are probably not going to be able to give you anymore on the brand sales trends other than what David already talked about, but we are excited about the new layers that are coming that David highlighted at various points but we have Frutista Freeze and Why Pay More? coming at Taco Bell. At Pizza Hut, we’ve already done the Pizza Mia and the Tuscany Pastas, which are the biggest sales layers for 2008 there. And the KFC layer, which is the big idea, it will come in early ’09.

Regarding though the commodity question and the pricing, et cetera, we got a little bit behind on the commodity inflation in 2008. When we had our analyst meeting in December, we thought we were going to have about 4% or so commodity inflation in 2008, on top of a 2007 that had a significant amount of commodity inflation. That number now is closer to 6% to 7% in the U.S.

In terms of our pricing, we took pricing at various times in 2007. In 2008, the main points that we took pricing were in February and in late -- and we expect to take pricing in late May, so we got, like I said, sort of behind on inflation in the first quarter and then we’ll catch up by the second half of the year.

The other thing we have going on the commodities side is that the commodities started spiking in the second half of 2007, so the lot between 2008 and 2007 on the commodities side is a little easier in the back half of the year.

To put some dollars around that, as an example, with the commodity inflation -- let me talk about -- I’ll start with food cost inflation and then talk about total inflation. Food cost inflation in the first half of the year, we expect on a year-over-year basis to be about $25 million per quarter in the U.S. In the second half of the year because of the spike we had in 2007 back half, we expect that number to be about $16 million per quarter. So if you add that up, that’s $82 million of food inflation for the year, which is between 6% and 7% for us.

We also have wage inflation of about 3% and other inflation around 2%, so when you add that up our total inflation rate for the year is a little over 4%.

On the pricing side, we were behind inflation in the first quarter. We expect to be largely caught up in the second quarter and then we expect to be slightly ahead by the second half of the year.

Jeffrey Bernstein - Lehman Brothers

Great, and actually just one other question -- you mentioned the refranchising efforts. I’m just wondering if we can get any additional detail on that front. I know you mentioned obviously a more challenging credit environment leading to potentially part of the slowdown of 1Q. It seems like everyone in the industry is focused on a very similar refranchising initiative. I just want to make sure as you guys look at this, I know you said you are in no rush, but it would seem like selling at this point, your brands probably aren’t doing as well as you would like. I’m just wondering if you can give us some color in terms of the franchise desire and whether credit availability is really having an impact in terms of your negotiations thus far. Thanks.

Richard T. Carucci

As I mentioned in the speech, we are confident that we will still reach our goal of potentially less than 10% by the end of 2010. Having said that, let me add a little color commentary. The credit situation is having an impact. It’s related to the type of transaction we are trying to do. The smallest impact has been to the relatively small deals, especially to our existing franchisees. These franchisees have generally built significant equity in their businesses and they have established banking relationships, so those are pretty much proceeding as we expected.

The more challenging transactions right now are the higher price and larger deals. This is where the current level of equity being required by the lenders has sometimes been an obstacle. We didn’t expect that when we started the process because some of these deals are high performing restaurants in desirable markets, so based on the current environment we may shift some more activity to lower priced deals for the balance of the year.

But again, I want to emphasize our refranchising strategy is to find the very best long-term partners to run the restaurants and we are well on our way towards achieving that. We think we have a floor sort of in 2008 of about 500 units, which is lower than we wanted. We were hoping more in the 750 to 800 range. We are still going to strive to do that.

But this is a three-year program. We are still on track and we are still looking forward to the financial benefits of better margins and returns.

Jeffrey Bernstein - Lehman Brothers

Great. Thank you very much.

Tim Jerzyk

Thanks, Jeff. Next question, please.


Your next question comes from Jason West with Deutsche Bank.

Jason West - Deutsche Bank

Thanks. Just one clarification on the income statement. I guess it looked like the net interest expense was down a little bit sequentially, although the net debt was up quite a bit from year-end. Just wondering if there was anything in that line item that would have caused the interest expense to be lower than expected.

Tim Jerzyk

Jeff, no, there really wasn’t anything in particular. The only -- from a run-rate perspective, just keep in mind the fourth quarter has four periods, Q1 has three periods. That would be the only difference. And you would have had the full quarter impact in Q1 of the $1.2 billion of debt that we added last October, because that was into the fourth quarter. So now you have a full quarter impact of that. And we did add some debt during the first quarter as we did the $1 billion in buy-backs using our revolver.

So overall the run-rate actually should have moved up slightly from Q4 because of those factors. But keep in mind again like I said, Q1 is a three period quarter and Q4 is a four period quarter. That would be the big difference.

Jason West - Deutsche Bank

Okay, that might explain it. And then one other question on the China business -- it looks like you guys consolidated a group of restaurants there. If you could just talk about what that was and the reasoning behind that decision and the impact on the profit. I guess the release stated what, $1 million on the operating profit but some of the numbers didn’t seem to add up there in terms of the sales versus expenses.

Richard T. Carucci

Well, let me start with the logic piece. The piece that we ended up consolidating was a joint venture in Beijing of which we are a 70% owner, and we made the judgment at the end of the year that we should consolidate that just based on the actions that have occurred, including us being able to control some of the people decisions. So that was an accounting judgment made at year-end 2007 and applies for 2008, and obviously that impacts the normal lines that you’d expect with revenue probably being the biggest one.

I’m not sure what your -- which item you are referring to in terms of the item you don’t understand the math behind.

Jason West - Deutsche Bank

I’ll follow-up with Tim on that one, so thanks, guys.

Tim Jerzyk

Keep in mind that there is detail on the China P&L around the specific impacts but yeah, give me a call on that. Some if it could be, as you add them up, could be just rounding differences because it’s a small, small business.

Jason West - Deutsche Bank


Tim Jerzyk

Thanks. Next question, please.


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

John Ivankoe - J.P. Morgan

Thanks. A couple of questions, if I may; the first, I mean, there seems to be a lot of discussion in the market about China, not only is there very strong top line growth but some of the inflationary pressures that they have seen might be permanent in terms of food, in terms of labor, and perhaps in terms of rent. So could you philosophically discuss your desire to protect restaurant level margins going forward and whether we should count on you using pricing outside of the big spikes to maintain margins at the store level?

Richard T. Carucci

Sure, John. First of all, if you look at what’s happened over time with costs in China, then I’ll give you my assessment on a go-forward basis. But over time, labor has gone up for quite a while in China and it was at a higher level than previous levels, sort of hitting the mid-part of 2007 and we expect that into 2008 as well.

Over time, commodities for us have actually come down in China as we grew our system from hundreds of units to thousands of units. Now, we don’t expect the rate of that decline to continue going forward but I also don’t expect the food inflation we had in 2007 and 2008 to continue going forward, personally.

China continues to grow infrastructure as a country, building better roads, better transportation, et cetera. The suppliers on the food side are getting more efficient, so I don’t believe that inflation on the food side is permanent in China for what we are facing. I do think wages will continue to go up and when you look at the math, we will take modest pricing increases to cover that and we expect to do that. The market so far -- I was very pleased with how the market reacted to the high price increase we took in 2007.

We’ve had record transaction growth since then so we feel very good about the ability of our brand to price with our inflation costs in the China market given the position. The team has done a great job of building over the years.

John Ivankoe - J.P. Morgan

Maybe let me just reposition the question a little bit -- outside of the big spikes in commodities that we’ve seen over the last I guess four quarters or so, should we expect margins to be stable, at least as partially explained by pricing and other types of growth in China, as you discussed?

Richard T. Carucci

That is my assumption. My assumption is that we will be able to maintain margins.

John Ivankoe - J.P. Morgan

Okay, and secondly I just want to get a clarification; we talked about commodities being a $25 million detriment to U.S. operating profit. I mean, that is a very big swing relative to the operating profit that you reported of $157 million and it looks like your food and paper would have been actually down 110 basis points if we were to have backed that out.

So is it -- is that you kind of assuming that you are running the pricing that you are running with no commodities, or is there something else that is happening there, perhaps store level management or a brand mix that I should be sensitive to?

Richard T. Carucci

I don’t believe there is anything in particular on the mix side, John, but basically what you are talking about is the other offset would be pricing.

John Ivankoe - J.P. Morgan

Okay, so that assumes that you took the pricing that you are going to take but commodities were in fact I guess zero growth year over year.

Richard T. Carucci

We took pricing, like I said, at various times through 2007 and we took some more pricing in February, so we had a partial quarter of pricing in 2008.

John Ivankoe - J.P. Morgan

Okay, I understand that. Thank you.

Tim Jerzyk

Thanks, John. Next question, please, Carrie.


Your next question comes from Steven Kron with Goldman Sachs.

Steven Kron - Goldman Sachs

Thanks. One follow-up and then one question; Rick, just going back to the U.S. margins for a second, can you just -- it seems as though the commodities caught you guys a little bit by surprise. Can you maybe just comment a little bit on the visibility you have going forward from a contracting standpoint? How should we be thinking about that? I think earlier you said something about September. Can you talk to us about the visibility here?

Richard T. Carucci

Are you talking about U.S. or global?

Steven Kron - Goldman Sachs


Richard T. Carucci

September was China, so on the U.S. side, we did get behind on the commodities side. We did expect, as I mentioned before, 4% to 5% for the year and now it’s more like 6% to 7%, so that’s a fairly significant increase. And we were -- we were always hedged, and I’ll talk about that in a little bit, for a fair chunk of it. We are probably a little less hedged than normal going into 2008, just because we were at high prices already and franchisees are generally reluctant to hedge at very high prices. So we had a little less hedging than normal.

From where we sit today, we are now largely hedged through the balance of this year, so most of our key items are hedged. The exceptions to that are cheese, which is still at a high level and some of the flour, wheat or flour products.

Having said that, I don’t expect a lot of risk in those two for the balance of the year versus what our assumptions were that we talked about.

Steven Kron - Goldman Sachs

Okay, and then a question on Taco Bell -- David, the new Why Pay More? value menu, can you drill down a little bit deeper? Clearly this is a big initiative for -- maybe “the horse” of 2008 for you guys in the U.S., but can you talk about how long you’ve tested this, what those results have shown, and I guess what is value as a percentage of the sales mix currently at Taco Bell? And do you feel as though this is an area where maybe you’ve lost some market share over the last year or two?

David C. Novak

Well, I mean, last year we had a tough year for some obvious reasons with the food safety issue that we had. I think first of all, we’ve tested this program. We put it in I think it was three markets and we did it in over the last five months. We’ve really gone after this very hard. We did a lot of consumer testing, concept testing, and we did market testing. And you don’t really -- we would not expand a national value initiative that we didn’t have the sense that it was going to grow sales transactions and profits, so -- versus the control situation. So that’s all I can really say and I really would rather wait until next quarter to tell you more about the value menu because we don’t like to tell everybody what we are doing in this area. But we just think we are going to be much more competitive, which is what we need to do.

As far as breaking out the Taco Bell value menu, I think the great thing about Taco Bell -- the brand is value. There is all kinds of value. We have it at the high-end and the low-end, but people are constantly amazed at how much food you get and how little you have to pay and how many items you can get for the amount of money. And in this environment, there’s no one that can really top what we have to offer.

I would look at this as the Why Pay More? as us being a -- as us taking a proactive measure to strengthen our already number one value position.

Steven Kron - Goldman Sachs

Okay, and then just lastly on the YRI business, any geographic out-layers in that same-store sales of plus 5% from your core regions?

Richard T. Carucci

Actually, the strength in YRI continues to be very broad-based. Probably the few weak areas are Canada, which is 100% franchise business. It’s modestly negative. Our Pizza Hut U.K. business is still working on and making improvements there. We are flat to down slightly. And Japan has been modestly soft. Other than that, everything is ranging anything from darn good to really good, really great across the rest of the world.

We’ve got examples like the Middle East where we are experiencing double-digit growth in comps on top of double-digit growth in units on the high end to high single-digit growth in Asia with comps with comparable unit growth. So the vast majority of the YRI business is doing really well.

Steven Kron - Goldman Sachs

Okay, thanks.

Tim Jerzyk

Thanks, Steven. Next question, please.


Your next question comes from Rachael Rothman with Merrill Lynch.

Rachael Rothman - Merrill Lynch

Can you talk a little bit about -- without getting into specifics around the same-store sales, of course, but about how successful you guys feel this shift to national advertising has been for Pizza Hut and KFC? And maybe to the extent to which that’s been ramped during the first quarter?

David C. Novak

I think you are referring to the fact that we had local dollars, local media dollars shifted to national network media. Just from a pure efficiency perspective, this is increasing our rating points dramatically and I just think we are a lot stronger off because of that and because we are able to get multiple messages across.

One of the things we’ll be doing now, for example at Pizza Hut is that we’ve got -- we’re advertising both pizza and pasta. At Taco Bell, we’ll be advertising three layers this summer. We’ll be doing the value, new product news, and the Frutista Freeze, and we are also with secondary media, we’ll be doing Fresco, which is our nine items with under 9 fat grams at Taco Bell. And what we are doing with KFC is we are able to advertise both the high end and the low end, the chicken on the bone and the portable type products.

So I think you’ll -- you know, we are getting the benefit of advertising these new layers that we are creating and you will see a lot more of that at Pizza Hut and Taco Bell in the balance of the year.

Rachael Rothman - Merrill Lynch

Was that fully ramped during the quarter or is that something that took place over the quarter?

David C. Novak

I think we’ve targeted, you know, our calendar is variable in the sense of that we have bigger news at different parts of the year, so I think we are loaded up more in the second and third quarters than we would have been in the first quarter. The first quarter you usually don’t bet the ranch on all the media because you can be affected by weather and a lot of different things, but the second and third quarter are the bigger times of the year.

Rachael Rothman - Merrill Lynch

Okay, and then just quickly, could you give us a little color on the outlook for FX, at least in the second quarter or whatever you could give as an update to your ’08 guidance would be great.

Richard T. Carucci

We didn’t specifically provide or update our full year guidance on FX but obviously it is looking pretty darn good. I would use the first quarter levels for China and YRI as a good estimate for Q2. Beyond that, we just don’t like to get into guessing at what the currency impact is going to be. But I think it’s pretty safe to say that Q2 again will be very strong for both our international businesses.

We do expect the year is going to be strong, particularly in China and obviously the Chinese currency I think broke to new levels against the dollar just recently. It actually is down -- it cracked below the 7 level, so that’s on an obviously strong path and again, we don’t try to get into predicting currencies but if you extend that out, that should be a pretty darn good benefit for our China business for the full year.

Rachael Rothman - Merrill Lynch

Great. Thank you so much.

Tim Jerzyk

Thanks, Rachael. Next question, please.


Your next question comes from John Glass with Morgan Stanley.

John Glass - Morgan Stanley

Thanks. Just two quick ones; on your U.S. operating profit growth of 5%, how dependent is that on refranchising, or are those independent events?

Richard T. Carucci

Not dependent.

John Glass - Morgan Stanley

Okay, and then your tax rate has been a benefit to you for a number of years and you seem to be able to under-promise and over-deliver and this year, you are talking about a 28% to 30% rate, so much higher than you’ve been. Is that still your guidance and if so, why? Why is that suddenly and finally changing direction from reductions over the last several years?

Richard T. Carucci

Yes, that remains our guidance, John and the reason is that we got some big benefits from two items in the past. One has been when we became foreign tax creditable. That gave us a large window to be able to take advantage of a lower tax rate for an extended number of years. And then the other benefit we’ve gotten has been returns of our federal forms. When those get settled, that settlement process usually yields an upside and we had a period of time where we had multi-year settlements coming through. But now the IRS is pretty much caught up and so we are only going to get one settlement a year.

So the foreign tax benefits that we’ve gotten over time and the benefit of having multiple years of settling with the IRS would just get diminished over time.

John Glass - Morgan Stanley

Okay, well, that’s helpful. Thank you.

Tim Jerzyk

Thanks, John. Next question, please, Carrie.


Your next question comes from Jeff Omohundro with Wachovia.

Jeff Omohundro - Wachovia

Thanks. I just wondered if I could get a little bit more color on the initial response to the delivery of pasta at Pizza Hut, maybe in terms of mix relative to your target. And what sort of product additions headline are you thinking about now and do you think there might be other opportunities to leverage Pizza Hut's delivery capabilities with further new products there? Thanks.

David C. Novak

First of all, we are very enthused by the reaction. The mix has been strong and stronger than test market. We have a number of pasta items, new items that are in development right now and so we think we will be able to develop a more complete line of Tuscany pastas as we go down the road. So you are going to continue to see us go after the pasta market. Our bold goal is to try to make that as big as our pizza business, so we are not looking at this as a small idea.

Now obviously we are a long ways from making that happen but we know that the consumer wants to have pasta delivery, and we have a delivery system that is there for the use and we have an oven system that also allows us to really bake some really delicious pasta. So you are going to see more of a full line of pastas as we go forward.

The other thing is that, you were hitting on this, we have the opportunity to use our delivery system to deliver more items as well. So in addition to pasta, that’s why we have Wing Street and Wing Street gives us an opportunity to develop flavored wings and we are looking at other types of chicken products that could go into that system as well.

The big news on Pizza Hut is we are transforming the brand to move from just pizza to be pizza, pasta, and chicken. And so we are moving from pizza to home meal replacement and the great news about this is that the consumer gives us tremendous credibility to do just that. Both the chicken and pasta items that we’ve developed fit very well underneath the Pizza Hut umbrella and it actually excites our current customers and it is bringing in new customers, so we are happy about that.

Jeff Omohundro - Wachovia


Tim Jerzyk

Thanks, Jeff. Next question, please.


Your next question is a follow-up from Joe Buckley with Bear Stearns.

Joe Buckley - Bear Stearns

Thank you. I wanted to ask a question about the level of discounting and promotion in the U.S. as you prepare to launch the Why Pay More? menu at Taco Bell. Is that because you see the level of price competition increasing?

Richard T. Carucci

Well, I just think, Joe, we’re in the environment where you have to do both. You have to smartly take pricing to cover the cost issues and you have to provide great value to the customers. And what we are trying to do is do both and segment those customers better than we have in the past.

So if you look at Taco Bell, we are doing that through, as David said, leveraging our strength and our value positioning and if you look at what Pizza Hut did with Pizza Mia, they’ve launched that product as a value pizza and at the same time, there’s reduced discounting on other pizzas. So we think that’s the right balance. My suspicion is competition has to find that right balance for them as well because they have the same cost pressures pretty much that we’ve got.

David C. Novak

The worst thing you can do in our industry, Joe, and you know this as well as anybody, is to discount your product and get zero credit for it. You are just throwing money down the drain and your margins go down.

What we’ve done is we figured out how to give people value that are looking for value but do it in a very targeted basis. And what we’ve done now, we used to do mass, mass couponing and discounting and we got very little credit for it at Pizza Hut, but with the Pizza Mia, we think we have the best tasting, best value product on the market that’s been particularly designed to give customers value. And I think we’ve -- we are very pleased with where we are at with Pizza Mia and it’s sustainable. We now have the opportunity to offer -- if you saw the ads, we talk about how this is everyday value. You can count on it, that the price isn’t going to change. It’s there. We’ve got this geared for sustainable everyday value, whereas most pizza consumers are trying to figure out what all the coupon means.

We’ve got this thing really simplified and I think it’s -- we are better positioned to compete over the long-term.

Taco Bell, we stand -- we are number one for value. We can take one or two or three or even nine, 10 items and bundle them differently, talk about them differently, and get a whole lot of credit for it versus just taking our pricing down willy-nilly on a number of items.

So we think these things through very carefully because we are very mindful of the unit economics that we want and our franchisees want as well.

Joe Buckley - Bear Stearns

Thank you.

Tim Jerzyk

Thanks, Joe. Next question, please.


(Operator Instructions) Your next question is a follow-up from David Palmer with UBS.

David Palmer - UBS

Two follow-up questions; Rick and Dave, I asked you this last quarter but are you seeing any evidence anywhere outside of the U.S. of a slowing consumer demand? For instance, the U.K. might be a logical candidate for some weakness but again, are you seeing a slowdown anywhere?

Richard T. Carucci

We’ve not seen sort of a global slowdown. You know, you always have markets that are doing better than others. You mentioned one, probably the U.K. which is probably slower than it was a year ago at this time, but -- certainly there is nothing prevalent that we have seen outside the U.S.

David Palmer - UBS

Okay, and Rick, thanks for your comments on the refranchising. I was just wondering if you could clarify exactly what is it in the financing market that is causing the slower than hoped pace in terms of what you were thinking internally would be your best case for refranchising pace? Is it simply that the borrowing terms, whether it be the financing rate or caps on loan to value, are leading to offer prices that are lower than what you are targeting? Is that it?

Richard T. Carucci

The short answer is yes, on the large deals. What I said before is on the small deals, we are able still to make that work because people have equity in their existing business and it’s enough if they are buying a small package to usually make the banks happy.

What you are seeing on the larger deals is the banks, and there aren’t that many of them lending at all, but you see the banks requiring 35% equity or more on some of these deals.

It is interesting -- in the past, we’ve actually been having to watch the banks and what I mean by that is we’ve always on our refranchising required a fair amount of equity. We’ve always required 25% or so equity and some banks may be willing to be more aggressive.

We are now in a situation where it is reversed as the banks are required 35 plus equity to lend and it’s hard for the buyers in some cases to make that work. We are still pursuing buyers. We still think we can get some large deals done, David, but it is going to be harder because there are few buyers who are willing to put up that kind of equity.

David Palmer - UBS

Thanks, that’s helpful.

Tim Jerzyk

Thanks, David. Do we have anymore questions, Carrie?


At this time, there are no further questions.

David C. Novak

Okay, well, let me wrap this up just with a few summary comments. First of all, our global portfolio this year will lead us to another year of EPS growth of at least 11%, building on our track record of consistency. Next you can expect global growth with 1,500 new stores opening around the world; the number one global retail developer in the world in Yum! Brands. And third, each of our businesses will generate free cash flow, giving us the global capability to return over $2 billion to our shareholders through share repurchases and dividends this year.

So we are off to a good start in 2008 and we are pleased that we can report to you that we are going to have another good year. Thank you very much.


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

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