百勝餐飲集團 (YUM) 2001 Q1 法說會逐字稿

TRICON'S FIRST QUARTER EARNINGS CONFERENCE CALL

Good day ladies and gentlemen, and welcome to the Tricon's first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce you to your host for today's conference Mr. Tim Jerzyk.

Good morning everyone and thanks for being on the call. Before we begin, I would like to mention just a few things. The call is being recorded and will be available for playback. We are broadcasting the conference call via our website at www.triconglobal.com. We advise that if you ask a question, it will be included in both our live conference and in any future use of the recording. We would also like to advise that this conference call may include forward-looking statements that reflect management's expectations which are based upon currently available data. However, actual results are subject to future events and uncertainties. I call your attention to the safe harbor statements contained in our earnings release, and on our website, that safe harbor statement is now incorporated in to this conference call. So let's begin, we have Dave Deno, our CFO, and David Novak, our chairman and CEO. Let me turn it over to David.

Okay. Thanks Tim, and good morning everybody. Let's start by briefly recapping our first quarter performance. We generated ¢59 in ongoing operating EPS for the quarter, and while this performance was below a year ago, it is totally consistent with our expectations going into the year. Keep in mind, it would have been ¢62 excluding forex, and we're also hit with an additional ¢3 per share related to the Taco Bell franchise expense, and like everyone else in our industry, we were impacted by the significant inflation in energy costs which will likely moderate over time. The good news is that while we have our challenges, we are more confident about the balance of the year, because the profit we delivered this quarter reflects improved US sales trends and continued strong international top-line growth. What's more, we are making good progress improving the financial health of the Taco Bell franchise system and plan to have this issue basically behind us by the end of the second quarter. Given the improving sales trends, we are confirming our guidance of at least $3.18 for the full year, and as you'll hear from our comments, this includes significant strategic investments that will drive future earnings. Now what I would like to do this morning is quickly review our progress against the five key areas, we believe, are long-term growth drivers and make us a unique restaurant company. Then my partner and CFO, Dave Deno, will take you through the financial detail, including a progress report on the Taco Bell franchise system. Deno will update you on the plans we are executing to drive sustainable same-store sales growth at Taco Bell and KFC, and keep Pizza Hut on the growth track. Now our five major growth and value drivers are, (1) International expansion. (2) US blended same-store sales growth from a portfolio of three leading brands. (3) Multibranded restaurant growth. (4) Franchise fee growth.

(5) Strong cash generation combined with high returns. I am pleased to report that we made progress in all five of these areas in the first quarter. Let me first talk about the biggest long-term growth opportunity we have. International expansion, we just set a record for international first quarter openings, allowing us to raise our full year forecast to 930 openings from 850. We've opened over 1000 new restaurants over the past 12 months, and this helps us drive strong system sales growth for the quarter of 9% in local currency. As many of you know, we have six strategic growth initiatives to continue driving our international business for years to come. These include China expansion of both KFC and Pizza Hut, building on KFC Europe, expanding Pizza Hut home delivery globally, igniting growth in Japan, Taco Bell development including multibranding, and KFC Brazil. Last year, we began allocating organizational and all our resources against these opportunities and spending has accelerated this year. The biggest move that we made in the first quarter is to strengthen our position in KFC in greater China, which includes China, Hong Kong, and Taiwan. The KFC brand is a powerhouse in China, and in fact, is ranked the #1 brand of any kind by the Chinese customer. This year we will open a 125 new units, and the investment is totally self-funded by the profit we are generating from Mainland China. We have achieved tremendous results because we have an outstanding management team that leads our entire company in performance. Taiwan has been a key market where KFC actually trails McDonalds in units by a 3:1 margin. This is extremely unusual because KFC dominates McDonalds almost everywhere in Asia.

We have operated in a subscale fashion through a combination of both company and franchise stores. The economy has been weak, and we have not been as competitive as we would like to be. Now, in order to gain scale advantages and leverage the capability of our China team, we opportunistically purchased 77 restaurants, which now gives us a total of 128 in Taiwan. This will allow us to expand more aggressively and potentially refranchise with appropriate partners once we get the business moving on all cylinders. This is a great long-term move that will help us improve on our strong double-digit growth in China that will lead to a significant expense in terms of transition and start-up costs in the second quarter. Now we've got it covered in our garden, you know, our guidance, but it will depress second quarter earnings for our international business, which will deliver mid-teens operating profit in total for the full year excluding forex. We will be making these kinds of investments as we drive international expansion in long-term profitability. Now, driver number two for Tricon is US blended same-store sales. We were flat for the quarter, which was ahead 2 to 3 points of our going in forecast for the quarter. We expect the balance of the year to show 2% to 3% same-store sales growth on a US blended basis. With Emil Brolick now at Taco Bell and Cheryl Bachelder at KFC joining Mike Rawlings at Pizza Hut, we now have three of the best brand leaders in the business to drive our performance. I'll tell you more about our action plans later. Now, driver number three for Tricon is multibranded restaurant growth. We opened 47 units in the first quarter and are on track to have approximately 1,600 multibranding units by year-end. Customers love these units and we love the returns. The customer prefers to have more than one of our brands in the same restaurant. We generate higher cash flow per unit, and finally, we're able to penetrate trade areas that we could not penetrate with proper returns with the single brand.

To put in more emphasis behind this opportunity, we recently assigned Tony Mastropaolo, an outstanding operator from Pizza Hut, as a General Manager to head a focused multibranding team. The charge is to develop even better operating systems in consistent execution for our customers. Now, our fourth driver is global franchise fees, which we love, and they're up 5% and totaled $180 million for the first quarter. We're definitely on track to generating approximately $835 million in franchise fees for the year, and then we expect this high-return business to continue to expand. Our fifth and final driver is strong cash flow and high returns. Here, we generated about $150 million for the quarter, and we're definitely on track to generate over a billion dollars for the year. Importantly, we are focused on maintaining our QSR industry leading return on investment capital of 18% this year by investing in high-return opportunities and driving growth from our franchise partners. Now I hope you agree we are making good progress behind these five majors that make us a unique restaurant company. Now, I'll turn it over to Mr. Deno, and then I'll close with our prepared comments out by talking about the progress we are making about our #1 challenge driving consistent same-store sales growth at KFC and Taco Bell.

Thanks a lot David. First, I will briefly review our first quarter results and overall trends, and then I'll provide an update on the very good progress we've made relative to the health of the Taco Bell franchise system. I'll review our expectations for the second quarter and wrap up with a view on the full year. The headline is that, even though we have our challenges, we feel very good about achieving all of our targets for the year. Before I go into the numbers, we did have one significant financial event since we last talked. We went into the market to raise funds to reduce our bank debt, which matures in October 2002. We felt we had an opportunity to leverage the current economic and interest rate environment, and we are happy to report that our bond issue originally targeted for $750 million was oversubscribed, and we were pleased to raise $850 million. I'd like to thank Denise L. Ramos, our Treasurer, and Goldman Sachs for all their efforts in getting this deal successfully done. Now the first quarter - we were pleased to meet our internal earnings projections for the quarter. Our sales growth trend continued to strengthen as we turned around KFC and Taco Bell. The sales gains were offset by higher energy costs, foreign exchange, and some start-up cost in international new unit developments and acquisitions. Moving to our international new unit development in acquisitions. When we talk international business - our profits were as expected roughly flat versus a year ago. System sales in local currency were up a strong 9% for the quarter. Our businesses in China, Japan, Korea, Mexico, and the UK, all had strong quarters. As David said, we also had a great deal of new unit development in acquisition activity in the quarter. Our international team continues to open restaurants at a record pace. We opened 199 new restaurants outside the US in the quarter, setting a new record, and nearly doubling last year's opening pace.

As a result, we are raising our new international opening target from 850 to 930 for 2001. Now, it's great to open new restaurants in such a rapid clip, but it does move start-up cost in the first half of the year. As most of you know that start-up curb for a new restaurant is, typically, around a 120 days before steady state operating margin performance is reached. We will continue to have start-up cost in our international business for the first half of the year. Additionally, we have incurred some new country start-up cost as we enter new businesses and spend money on our strategic growth initiatives. We have had and will continue to develop our KFC business in continental Europe. We are researching and exploring a new venture in Brazil, and we are continuing to look for ways to make Taco Bell successful outside the United States, which may include multibranding. And finally, we have had and will have some acquisition transition costs for our newly acquired Pizza Hut France, and as David mentioned, our Taiwan business. Keep in mind that we have not changed our overall ownership target of 20%, but we have a chance to capitalize on our business opportunities especially in Asia, where we are so strong, we would be a fool not to. Forex was the last significant international issue in the quarter. Foreign currency conversion to US dollars did impact us by ¢3 a share, which was expected, but at the high end of the range. At current rate, this will be an issue for the first half of the year but will lighten up in the second half. Turning to United States, blended same-store sales were better than expected. This was due to a solid quarter at KFC and steadily improving results at Taco Bell, and as we all know, Pizza Hut continues to do very, very well. On the margin side, energy cost impacted us by about ¢3 a share or roughly 60 basis points. Even with this downside, we were able to hold overall margins flat in the US.

We will discuss this more in a minute, but we experienced about $7 million of costs, related to our Taco Bell franchise system issues or about ¢3 a share. Importantly, the capital and expense cost associated with these workouts are, so far, coming in as we expected. So to summarize, we absorb a great deal of expenses in our first quarter cost structure, and we were able to meet our targets. Most notably, our sales are improving, and we are developing at an accelerating rate outside the United States. We continue to believe that our Pizza Hut and KFC businesses can be much more significant international businesses over the next 10 years. Before turning to the second quarter, let me update you on where we stand with the Taco Bell franchise workouts. As mentioned earlier, we took an additional $7 million of expense in Q1. During the quarter, we were able to complete workouts for about 300 Taco Bell franchise restaurants. We have now completed about 30% of the restructuring that needs to be done. They are being done within the financial parameters we laid out earlier. As outlined in our February call, we had about a 1000 restaurants that needed to be restructured and that number in total has not changed. We continue to make progress on the remaining 700 restaurants. We have come to agreement in a large number of these situations and are working towards deal closure. We expect a majority of these restaurants to be worked out in second quarter. The possibility does exist for Tricon to take some charges in the second quarter as we work through this issue, and I'll get to that in a minute. In short, we are making very good progress on this difficult issue and working closely with our franchise partners. All the parties, lenders, and the franchises in Tricon are coming to the party to solve the problems. At the end of this, we are confident that we will finish with a stronger system better prepared for growth.

As a reminder, some of the tools we are using to work out these situations include reductions in bank debts, reamortization of the bank loans, equity infusion by franchises, loss of some past due royalties on our part, notes for past due royalties, and acquisition of some franchise restaurants. Importantly, and as we have said previously, there will be no modifications to current royalty contracts, and virtually no closures of these restaurants cash flow at the restaurant level. And as have we mentioned earlier, based on what we know today, we will be able to address the Taco Bell franchise issue and stay within our profit and cash flow guidance for 2001. This includes the possibility of acquiring 150 to 250 Taco Bell franchise restaurants, which is unchanged from previous guidance. We will keep you updated on the progress, and if anything changes, we will let you know as soon as possible. We will provide another update in our Q2 call in July. Now for the second quarter - we expect top-line improvements in the US to continue. We feel very confident that each US branch will deliver improved results versus first quarter performance. We expect US blended same-store sales growth to stay on current trend or better, with sales growing at least 2% and potentially as much as 4%, if our program that David will describe go really well. We strongly believe that this performance speaks to the power of our brands. In total, top-line performance is much healthier looking ahead. We expect 2% to 3% blended same-store sales growth in the US for balance of the year. On the cost side, issues that I touched on earlier will carry through to the second quarter. As a result, our US margins will be down some in the quarter. We talked about the second quarter cost expectations in a little more detail. First of all, energy cost will be high, nearly as much as they were in the first quarter and will impact us by ¢2 to ¢3 a share or 60 basis points in margin.

Secondly, we will have a higher-level advertising spending in the balance of the year. As we mentioned earlier, the KFC system decided to increase network spending late last year. This would be in place for all of 2001. Additionally, the Pizza Hut business has increased ad spending this year. We also will continue to spend against our brands. Specifically, more trading and operation support of Taco Bell, continued reinvestment in our Pizza Hut and KFC restaurants as we transform those assets, and as a reminder, there is capital and expense associated with this, and we will be doing product quality upgrades at the KFC and Taco Bell. Next, commodity cost will be slightly less favorable in the second quarter versus the first. Primarily, the cheese cost has moved into a more normal range. Even though the cost of cheese has moved into a more normal level and we have partially hedged our usage, the cost is up 15% to 20% versus a year ago. So that will affect our margin comparisons. Now for international business in Q2 - we expect system sales growth once again to be strong, but as in Q1, we will have some forex downslide and some spending on growth initiatives that will impact profitability. Specifically, foreign exchange will cost us about ¢3 a share. Secondly, we will have one more quarter of incremental spending on international growth initiatives. When we reach the third quarter, that core spending would have lapped the initial investment begun in the year 2000. There will be continued start-up cost from new restaurants, the start-up from our Thailand Pizza Hut business, and significantly, from our recent Taiwan and France acquisitions. The costs from these acquisitions will have the largest impact in the second quarter. In total, these start-up cost will reach to $7 to $9 million in the quarter.

As a result of the above, we expect profits from our international business to be flat excluding forex in the quarter. Now, excluding Forex and the $7 to $9 million cost for start-up that I discussed, our base international business will be up double-digits in the quarter. So clearly, we remain on track, and for the year, we remain very confident that our international business will return to reported double-digit profit growth for the back half of the year, and achieve its earnings goals for 2001. Now a couple more things about the second quarter - even though it was described earlier, we expect $5 to $8 million or roughly ¢2 to ¢3 a share related to Taco Bell franchise system restructurings. In non-restaurant or structural costs, we expect interest expense to be flat and our operating tax rate could be below our normal run rate of the high 30s due to the impact of tax strategies that we have been working on. As I said in the past, our tax initiatives tend to come in lump, and in the second quarter we could see this, and of course, we will continue to tightly manage overhead costs. So, factoring the above information, we expect operating EPS to in the ¢70 to ¢74 range for Q2. This result, along with what we have achieved in Q1, will put us well on the way to achieving our operating EPS target of 318 for the year. All in all, you should get a sense that we intend to accomplish a lot in 2001. We have critical opportunities, and we are moving ahead with a sense of urgency. Now, finally, for the full year, we continue to expect on going operating EPS of at least 318. The key points of the forecast are: at least 930 new international traditional restaurant openings, at least 2% of US blended same-stores sales growth.

International profit growth in the mid-teens range on a comparable 52-week basis and excluding significant foreign exchange impact, that means a good second half for international, franchise fees of about $835 million, overall restaurant margins even with last year at about 15%. We'll continue to tightly control SG&A costs, roughly flat with last year's dollar spending, and we're going to make more progress in our non-restaurant or structural costs, interest expense reduced by about 5%, and further improvements in our operating tax rates, and you can expect a $200 million reduction in our debt and continued execution of our $300 million, 2-year share repurchase authorization. That also is about ¢6 impact from foreign exchange from the first half, which is what we said last November. Current levels in our key currencies would impact us another ¢2 to ¢3 in the second half, but at this point, I will not even attempt to forecast what the US dollar may do 6 months from now. To close I want to emphasize, the business is clearly moving ahead. Top-line performance has significantly stepped up allowing us to offset substantial energy cost inflation and continued US dollar strength, 318 for the year is clearly in our sights. Hopefully, that gives you a good sense of the Tricon business outlook and the reasons we are confidence in that outlook. Now back to you David.

Okay, thanks Dave. In the last year, we had negative same-stores sales growth in Taco Bell and KFC. So going into this year, it was clear that our number one challenge was to improve our sales. We are well on our way at KFC and we are getting there at Taco Bell. First lets look at Taco Bell. Taco Bell was down an unacceptable 6% for the quarter but has made steady improvement month-by-month. We are confident that sales will turn positive in the second half of the year. Here is why. Emil Brolick is taking a very disciplined approach he is known for to turning Taco Bell around and turn it around for good. He is working on a one-two punch of improved operations in margins and marketing. On the operations front, focus continues on improving cleanliness and speed. Our internal champ score show improvement with a score in the first quarter of 86% versus 81% last year - still not where we want to be but steady progress. We are rolling out a program called [growth cute] in which are making the investment to add more above store supervision, reducing the spans from 8 to 10 restaurants to 6 to 7 of that first line supervisor or what we call our area coaches. This is paying off in customer service and productivity. What's more, we've launched the Taco Bell blue camp in the first quarter with this group of leaders to get the proper operational focus going forward. On the marketing front, the strategy is to improve our core product quality by launching demonstrably superior products and fortifying our industry-leading value position. In the first quarter, we began our quality march with the launch of the new Steak Taco. It was extremely well received, so much so that the consumer demand was so high we actually ran out of product. This was great news because it demonstrated we could sell higher quality, higher priced items at Taco Bell.

This past weekend, we launched the Grilled Stuff Burrito, which is a major quality upgrade with the premium price Burrito. It adds grilling, more flavor, and a much hotter temperature product in the most affordable form we have ever introduced at Taco Bell. Mix reached 10% without advertising which once again demonstrates the natural acceptance of higher price premium products at Taco Bell. More quality upgrades are in process - tortilla, beans, and beef to be introduced this year. Our goal is to the make the best highest quality Tacos and Burritos in the business. Now Emil and the team are also making plans to roll out a new way to more dramatically dimensionalize our industry-leading value positioning. Value propositions are in cast and we'll keep you informed as we finalize our plans. Longer term, the big strategic insight is for Taco Bell to broaden our reach, maintaining our stronghold with our core heavy users and drive traffic with lighter and medium users as the leading variety option in the quick-service category. We believe we have been far too focused on the current heavy user, which is primarily price-driven, and have not done enough to grow the category. As a market leader with nearly an 80% share, we need to extend frequency of our entire user base which is broader than McDonalds if you exclude kids. For this end, the team is working on new advertising approaches and aggressively developing a pipeline of products that will broaden RPO. We are excited about the products the R&D folks were developing so stay tuned. The bottom line is we are making steady progress, and we are confident Taco Bell will turn positive at least by the 3rd quarter of this year. Of course, we have a very weak overlap, which only strengthens our conviction. We know the real test is next year, and we're already working on it. Now lets turn to KFC.

We have made even more progress in KFC and the brand in fact has had 3 straight months of positive same-stores sales growth, and we closed out the quarter up 2%. We're even more optimistic about the future. Cheryl Bachelder has come in, quickly gained the confidence of the franchise system, and is aligning the entire organization around the key issues. The plan is to drive continuous product news in 4 chicken segments. Chicken-on-the-bone, Strips, Wings, and Sandwiches. Operationally, KFC would be very focused on training and setting up improved restaurant processes to reinforce the need for hot and fresh product because quality is where we want to differentiate. We're also seeing the power of having a balanced marketing counter. Spicy barbeque wings drove major growth in February and now we are seeing the strength of bringing news to the Chicken-on-the-bone segment with the launch of the improved Extra Crispy. We have a steady stream of news scheduled for the balance of the year against Strips, Original Recipe, Wings, and Twister. Importantly, all the news can be delivered within the existing operating platform, requiring no capital investment and simple operations. You may also recall that the franchise system agreed to invest an incremental one-half point in advertising to support Chicken-on-the bone and off the bone products. This will give us a balanced calendar, and this will also allow us to effectively communicate the news to the consumer. Finally, DVDO is fully on board as KFCs new advertising agency, and we expect them to develop advertising that better differentiates KFC and contemporaries the brand's image. All in all, we believe KFC is back on track and will stay on it. At Pizza Hut, we will continue to win on the basis of quality, pizza innovation, and every day value.

The Twisted Crust Pizza has further differentiated Pizza Hut as the innovation leader. If you haven't tried it, you've got to do it. Customers just love this pizza. It has a strong mix repeat in overall ratings. The first week of the network launch of the Twisted Crust, Pizza Hut had record weekly sales. And the pizza operating team did a great job of launching this product. Based on our champ scores, it had the highest quality rating of all of our pizzas, even higher than Pan Pizza, our flagship. We also improved service times during the launch when crews are most challenged. As a result, pizza continues to deliver consistent same-stores sales growth even in the phase of very heavy discounting by the two other large chains. Believe me, we have more exciting pizza news coming. The pizza team has an outstanding product development process, and we will continue to delight the heavy users with new products and great value. I would also like to congratulate Mike Rawlings and the pizza team on regaining his place as the #1 National Restaurant Chain in restaurant institutions, magazine's annual consumer ratings. Now, wrapping it all up, Tricon's same-stores sales growth momentum is much stronger than it was going into the year. Pizza Hut continues to roll, KFC is now positive, and Taco Bell is getting there. We have the leadership and the programs in place to deliver at least 2% on a US blended basis for the full year. We do have our challenges, but the brands are all moving in the right direction. We welcome any questions that you may have.

Thank-you. If you have a question at this time, please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. Once again press the 1 key if you have a question. Our first question is from Joe Buckley of Bear Stearns.

Good morning. A set of couple of questions - I was wondering if you could fill in some details on your acquisition activity during the quarter exactly what you bought, sort of where, and maybe you put a couple of financial numbers around it? And then on the Taco Bell workouts, I was kind of curious sort, of what, role Tricon is playing in that? You mentioned that there was no change in the royalty expectation, just curious if there is any forgiveness or past royalties or any guaranties, things of that sort?

Okay. Sure. It's Deno. How are you doing?

Great.

First of all, let's go back to my comments. We talked about Taco Bell situation that the banks are looking at their own debt balances. We've got some re-amortization of loans. We've got franchisees putting some equity in. We do have some write offs that we've taken and that generates some of the charges that we've taken over the past few quarters. We have taken some notes on past two royalties, and we have brought back some restaurants. But that's all within prior guidance and discussion. So, that's kind of rolled up our plans as we work with the parties, but we make sure that all three parties comes to the table appropriately, and like I said before, we're making a very good progress on this.

And I think, the important thing is to build on that because going forward, we're keeping the same contractual structure in place, and we've had virtually no closings. So, you know, this is a problem that we're going to put behind us and put it behind for good.

How many Taco Bell restaurants have you bought so far?

About 70.

Is that subsequent to the first quarter then?

A ha.

Okay.

And then on France, we've bought that at the very end of last year. It was a joint venture that we bought out, and we're looking to consolidate our operations there, and in Taiwan we bought 77 restaurants, KFCs, and we now own and operate all the restaurants in Taiwan, and those of you who have followed our company very closely know about the great business we have in China, and we're going to capitalize on that and that's why we did the deal.

The cumulative effect of everything you bought, is it, I guess, obviously dilutive in the short run, but on a full-year basis, where would you expect it to be?

It will be slightly, very slightly dilutive, but the costs are going to come in the second quarter and then from there on forward it will be accretive.

Thank-you.

Thanks Joe. Jill, Next question please.

Thank-you. Our next question is from Victor Hawley of RCB Investment Management.

Hi, you said that the energy costs you expected to moderate and I am wondering whether, is there something you see or contracts you have entered into with, you know, for forward pricing and why do you expect them to moderate?

Yeah. We have taken some forward contracts that will kick-in in the second quarter and, therefore I think we are going to see some benefit for that, it didn't kick-in much in the first quarter, but we think that we are going to be okay there. And then gas prices usually in the summertime, isn't quite as heavy as the wintertime. But, more importantly, I think we have done some good job managing through this issue.

How long term are your contracts?

They are relatively short term.

Okay. Thank-you.

Yeah.

Thanks. Jill, next question.

Thank-you. Our next question is from Mark KALINOWSKI of Salomon Smith Barney.

Excuse me. Two things I wanted to ask about. First, you had stated that China had essentially implied positive comps in Q1. Just wondering if you have seen any pullback more recently just because of the political issues that have been going on or whether the business has fully maintained the momentum there? And second, just on the Grilled Stuft Burrito, you know, speeder service has been an issue at Taco Bell. The Burrito does require the use of a new machine in the restaurant and, I just want to get a better handle on what you are seeing in terms of speeder service with this product now in the restaurants? Are you still able to improve overall speed of services or is this causing a slight hiccup?

In answer to the China, I will take the China question and David will take on the Taco Bell question. In answer to China, our momentum continues to be very strong there. We didn't see an impact from the recent issues we've had over there. So we continue to open up the business operand quite well. David talked about 125 new KFCs, and we did not see much of an impact from the issue over in China.

And Mark that's the gradient side on the Grilled Stuft Burrito and the potential impact on the speeder service, the average bill time for a Taco Bell product is about 40 seconds. The bill time for a Grilled Stuft Burrito because we grill it after we finish it off with grilling is 70 seconds, that's still is 30 seconds more. As we trained our people to rollout that product, speeder service was the real focus in terms of what we have to deliver to our customers. It does take more time to prepare in our restaurants. In test market, we saw basically, it was neutral in terms of the overall impact from our champ scores but it is something we have to be aware of. It's a major focus operationally, and we think we can deliver our speeder service basically on par with where it was at, but it is challenging and we think we'll handle it. But it's a great question.

Thanks Mark. Next question please Jill.

Thank-you. Our next question is from John Glass of Deutsche bank.

Thanks. Good morning. Two questions. The first is - can you update us on the refranchising efforts for the year? It seems that the pace may be slowed a little bit in the first quarter. Does that have anything any to do with tighter franchise finance environment out there or anything to do with Taco Bell? And secondly, could you update on the remodels, you talked a little bit about it. Are you seeing sales lift or material sales lift from the remodeled units? Thanks.

Yeah. I will answer the first question on refranchising. Clearly, that was, as we talked about the year, we knew that we are going to slowdown our refranchising plans this year. So therefore, you will see some refranchising activity in the year. We still hold to our guidance but clearly that's down versus prior year's, if we wrap up the program. Now, we will always continue to review our restaurants to make sure, we've earned the right to own those restaurant, but clearly our big refranchising push is about coming done. Most refranchising activity is at Pizza Hut and KFC, Taco Bell is pretty much done. Now, on the remodels, we are seeing about 7% to 10% growth out of our remodeled assets and that's something we'll continue to push for as we are pushed to have a system capability upgrade over the next 3 or 4 years. So, that's in our capital plans and part of our programs.

And how many units did you remodel during the quarter?

John, it was in the neighborhood of 40 to 50 at both KFC and Pizza Hut.

Great, thank-you.

Thanks. Next question please, Jill.

Thank-you. Our next question is from Tony Howard of Hilliard Lyons.

Hi, good morning. Can you talk a little bit on as far as how you're seeing the multibrand units are doing? In the report, you talked about you are going to go from 1200 to 1600 multibrands. You really don't talk about three-in-ones, or the best thing, and then my second question, you have mentioned in your previous conference call that you set aside a 100 million in capital for acquisitions. Do you think that is adequate or where do you expect that to go?

I will take the second part first. We still feel very confident about our product guides of $75 to $125 million in acquisition capital of Taco Bell. It's in our numbers and in our guidance. On multibranding, basically our sales performances are as good or better than our typical single-brand units, and our cash flow per unit is higher than our existing restaurants. We also have made progress on our operations front. We have brought in Tony Mastropaolo to help with that, and we'll continue to expand this and that's why we feel so bullish about multibranding expansion going forward. David, you want to talk to the three-in-ones?

I think, you know, we think the big idea in multibranding is two-in-ones. You know, we've done some three-in-ones, we'll still do a few more of those, but the real focus that we have is two-in-ones. The three-in-ones just add more complexity than it's really worth. Bring two brands into the same asset is quite satisfactory from the customer standpoint. We have better operations and better economics. So, we're not going to make three-in-ones a big push, although we do have some franchisees who will be opening up some three-in-ones because they are really high on it but that will be a very minimum activity.

Thanks Tony.

Thank-you.

Next question please, Jill.

Thank-you. Our next question is from John Ivankoe of JP Morgan.

Thanks so much. I want to have three questions, two should be fairly short. First on G&A, flat for the year, we certainly understand that the international business is growing and you're clearly spending money and resources as you should be to allow the growth of that business. Could you kind of explain what's necessarily dropped off to enable G&A to be flat on a 52-week basis? Second and looking at the down margins, restaurant margins internationally, to what extent may forex have played a negative role in margins being down? And, finally, it's a followup on a previous question, you know, the throughput of that Grilled Stuft Burrito, the difference between 40 seconds and 70 seconds, may theoretically actually slowdown the throughput in a drive through, maybe by 50%, 40% or so. Could you talk about, maybe your experience in the drive through with getting people [see the lines] and what may have actually happened in the drive through launch with the product, and specifically, what if anything that you can do to perhaps stage that product or, you know, kind of cut at least one stages of production out of that and to reduce the timing of that product?

First of all on overhead, one of thing I guess they are trying to bring as CFO is outside of restaurant cost is being very, very, very, we are very closely managing that. We have a large opportunity in our company, which we've taken advantage of and continue to take advantage of and what I would call infrastructure cost. I manage a large finance organization and accounts organization for instance. We continue to be extremely efficient in pursuing all the opportunities. We continue to be efficient in pursuing other opportunities that we have in our company. So basically John, what we are doing is we're investing behind international in overhead. We're investing behind some of our other opportunities, and what we are doing is cutting back and becoming much more efficient in some of our main-line infrastructure cost. Now remember, when we were formed as Tricon, we were basically 3 or 4 separate companies with four separate infrastructures. We are just taking advantage of that opportunity in our infrastructure cost and pursuing them as best we can. So that's how we are funding this, and that's we are never going to let of, Secondly on the margins, forex did have some impact, John, but mainly I think it had to do with some energy cost outside the US and also the start-up cost that we talked about those were the two drivers, forex is not, it was part of it but the other two were bigger. Dave, you want to talk about it?

Yeah, John I think this question about speed is the challenge with the Grilled Stuft Burritos. Great question. Basically, we can stage this product well within our target in terms of two-and-a-half minutes for drive through times that we are going after, what we've done is try to facilitate it, making easier for operators as we get grills on the front and the back of each of our production lines, and you know, it's an ongoing challenge, get out of the stores already, have been out there and try the Grilled Stuft Burrito. I think by and large we are doing a good job but I've had some speeder service issues where I'd like to see it to be better, but it's not an alarming problems, it's something that we're managing, and we feel very confident that we'll be able to do this within the operating system of Taco Bell.

Thanks Dave.

Thanks John. Jill next question please?

Thank-you, our next question is from Mitch Speiser of Lehman Brothers.

Thanks, a couple of question. First, on the second quarter charge that you elude to, perhaps to Taco Bell, can you give us perhaps the magnitude and what might be behind that? Second, on Taco Bell, you did indicate on the fourth quarter conference call about simplifying the menu. I was wondering how that is coming along and if you think that could provide an adequate offset to maybe slower service times from the Grilled Stuff Burrito? And, just lastly, on transaction accounts at Taco Bell, where does that stand today and do you think in the back half for the year the transactions could be up or is the cost forecast more contingent upon a higher average check? Thank-you.

Good morning Mitch, David. First of all on the Taco Bell cost, we expect $5 to $8 million of charges in the second quarter, that is pretty much consistent with what we've been thinking about, and in talks to some of the measure that I talked about earlier Mitch, about some of the royalty things we got to deal within some of the notes. On the second question about the menu simplification, I think first of all for the second half of the year Mitch in Taco Bell, we think transactions will be at least slightly positive as move the business forward. Emil and the team are working on menu simplification. We've actually taken some minor things off the menu already. He has got a major program behind us, that's more dramatic. I don't think it will have any impact this year, we've worked with one of our best franchisees in Texas, who has got a great simplified menu board that really build terrific job of getting rid of a lot of the complexity. We're testing that and hopefully that will be some upside force as we move into 2002.

Thanks Mitch. Jill, can we have our next question?

Thank-you, our next question is from Andy Barish of Banc of America Securities.

Hi, question just on some commentary on the margins in the US on favorable product mix and pricing. Can you just give us a little bit more color as to where that was? And, then also on the food cost line, is that fully reflecting the new distribution agreements and all that as of the first quarter?

Yeah, the foods with due distribution agreement were in the place during the last year. So all that is in there and it's all within our guidance. So, we have that reflected in the year, and we have that reflected in all of our guidance going forward the distribution agreement. Now on the mix and margin piece - two things specifically happened. One, the Steak Taco at Taco Bell, as David mentioned, was an extremely popular product, and it had a pretty good price pulling on, that was the fist thing. Second thing is, we did not discount sandwiches at KFC this quarter, and remember when we rolled out the sandwiches, we had various marketing and discounting programs going on at KFC last year. Thanks Andy.

Thank-you.

Jill next question.

Thank-you, our next question is from Janice Meyer of Credit Suisse First Boston.

Hi, thank-you, I have two questions. One the store closings looked a little heavy in the quarter, so I was wondering if you could comment on that and your plans for the year, and what prompted what looked like a large number of closings in the quarter? And secondly, a lot of the things you said about what you're doing at KFC sounded very similar to what you said in November before Cheryl came on board, now I was wondering if she has found any additional issues or new programs to put in place in addition to the ones that you talked about in November?

Yeah, let me take your first question on the closures. One of the things I talked about in my remarks was that our Pizza Hut Thailand business agreement came to an end. So, actually, as we account for that, those restaurants that are not converted or gone are closed. Okay, it was a one-time event, and then we have the start-up cost, which I mentioned about our Pizza Hut Thailand business, partly in the first quarter, but also in the second, and now we have to basically rebuild an open restaurant behind that business to make it happen. So that's the big reason for the change in the closure amounts, not something you'll see going forward.

Janice, in terms of some of the insights that Cheryl has had, you know, I think number one is that just from the positioning stand point, she has come in and been blown away by the quality of our food vis-a-vis QSR competition. The fact that we have real food, the fact that our chickens are freshly prepared, the fact, you know, we have recipes other people prepare things, you know, she sees this as the big opportunity for us to drive more differentiation as we move into the future and really reinforce our real food, fresh food values that we do have at KFC that we really haven't done a good job of marketing in the past. So that's one thing that she is very keen on as we go forward. Operationally, she has spent a lot of time with franchisees and getting out of stores and meeting with Jackie Trujillo who is also on our board, and who is a franchisee, and she is really very keen on driving the focus of hot and fresh in terms of our product, making sure that all of our products are served within holding times. This has been an issue. Our product quality in the lab is superior, it's outstanding but in the stores, the execution is in the hotness and freshness we like it to be. So we're working on, and she has initiated service programs to get us moving forward. The other thing that she is also attacking is KFC's value perceptions, particularly at the lower end of the venue. You know we don't have that, you know, that everyday low-end value. If you got less than a buck 50 to [________________], we don't have anything for the customer there. So she plans on putting things and test to see if that's an opportunity for us to drive purchase frequency down the road, and also one of the things she learnt from Domino's, they had a complete asset renewal there that really did a lot to help drive their sales.

So she is really working with the franchisee, you know, we're 80% franchise in order to try to revitalize and renew our assets. The attracting thing about KFC globally is it's by far in a way our largest opportunity, and basically what we've done is, you know, we now have the product line and the opportunity to do in the US what we've successfully done in the UK and Australia. You know, become more QSR and also have the home meals that give us a really unique advantage in the marketplace. So, I think she is really on top of things, fairly well received from the franchise community lying between here, and I think she'll add a lot of value. Frankly, the other thing is that KFC wasn't in much trouble as Taco Bell. We made a strategic investment last year in sandwiches, all of this, you know, it's in our base now, it's something that we can leverage off up as we go forward, and so she is coming in and has inherited, I think a better situation than what we had at Taco Bell, and I think we're making quicker progresses.

Great. Thank-you.

Thanks Janice.

Thank-you, our next question is from John Fox of Fenimore Asset Management.

Hi, my question has been answered, thank-you.

Thanks John. Next question please, Jill.

Thank-you, our next question is from Joe Buckley at Bear Stearns

Thanks, just a couple of followup questions. You mentioned cheese costs picking up, I think you said maybe 15% to 20% in the second quarter, I was wondering if you could discuss the full-year outlook for cheese cost given your recent market run ups? And, then also just on the international operating profits, the full year, to do with mid-teen operating profit growth, what kind of growth you need in the back half of the year to achieve that?

Yeah, for international we clearly need a strong double-digit growth, back half of the year. Now the one thing that I'd remind you about is a couple of things. One, forex lap - the forex lap was very difficult the first two quarters. The forex rates, the dollar shrinking significantly particularly in the third quarter last year, so that's something that gives us some cause. Also, you know, as David talked about, the Taiwan acquisition was very, very important to us, and you know, we're going to take some expenses in the second quarter, but we think that's a very, very important transaction for us. So in the back half of the year those expenses will not be difficult. Now just one thing when I give you the guidance, it is on a comparable 52-week to 52-week guidance. But we expect that group to perform at the double-digit range for the year and double digits for the back half also. Okay, then cheese, your second question on cheese, we expect it be up about 15% to 20% for the second quarter, the outlook, we're not here to exactly predict the cheese market per say, but we expect it to be up some not nearly 15% to 20% but we expect it to be up some for the year and its in our guidance.

Is the cheese market moderating?

Cheese market did pick up and got stronger during the quarter, I mean, it did get more costly now, but I'm saying now is it's coming up a very low rate, it's coming into a more normal range. Okay, I mean, and that just happened here in the last few weeks.

Yeah, Joe, if you look at our forecast internally as much as you can forecast cheese, when you look at a year-over-year the Q2 last is really the toughest of the year, based on what we believe will happen to the balance of the year.

Right. Okay, thank-you.

Thanks Joe. Next question please.

Thank-you, our next question is from [_______________] of Equinox Capital Management.

Hi, most we're answered but maybe I'll ask if you're seeing any anecdotal, this has been asked before, evidence in the UK or elsewhere that your concepts will turn out [be spaced] or maybe drawing in customers that previously had gone to McDonalds or other hamburger-type joints.

Yeah, we are very strong in UK businesses, that came in the year with strength, have gotten better. We're not seeing wholesale huge sales increases, but a very strong business that has gotten better.

Okay, and maybe one more question, somebody put out a notice something with gasoline prices, and have you historically seen any correlation with high gasoline prices and perhaps a drop off at the stores?

No. We have not seen that. This business is pretty resilient in that regard.

Okay, thank-you.

Thank-you and our last question is from Scott Waltman of Merrill Lynch.

Thank-you. Actually, I have two questions also. First of all concerning the tax rate, is the possibility of a lower tax rate factored into your 318 operating EPS estimate goal?

Yeah, we still believe that the tax for the year to be 37% to 38%, we hold by that. You know tax swings happen, you know, as you try to correlate forecast taxing come and they go, etc. So, during a particular quarter it might be a little lumpy but for the year we are at 37% to 38%. Just remind everybody we are 37% in last year.

And secondly, just a followup on the two previous questions about transactions. Would you actually breakdown for us the price mix and transaction components for the same-store sales by brand in 1Q, and then, you know, how did these components actually trend during the quarter, and sort of what are you looking for in terms of those components in your full-year goals?

Scott I'll followup with you on the trend, but basically for the quarter, KFC's comp growth was all transaction. Pizza Hut was approximately half of that due to transaction growth and Taco Bell's decline was basically comparable to transaction decline.

Thank-you.

All right, thanks everyone, we appreciate your being at the call.

Ladies and gentlemen, this concludes today's conference, you may disconnect at this time. Thank-you.