百勝餐飲集團 (YUM) 2002 Q1 法說會逐字稿

Good morning. My name is Terry, and I will be your Conference Facilitator today. At this time, I would like to welcome everyone to the 2002 First Quarter Earnings Release Conference Call. All lines may have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Question and Answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would like to turn the call over to your host, Mr. Tim Jerzyk, Vice President of Investor Relations. Thank you, Mr. Jerzyk, you may begin your conference.

Thanks, Terry. Good morning everyone. Thanks for joining us on the call. Before we begin, I would like to go through a few necessary things. This call is being recorded and will be available for play back. We are broadcasting the conference call via our website at www.triconglobal.com. If you ask a question, it will be included in both our live conference and any future use of the recording. I would also like to advise that this conference call might include 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 previous Safe Harbor statement as of the date of this call and may continue to be used while this call remains in the active portion of the company's website which will until our next quarterly earnings conference call. On today's call we have David Novak, Chairman and CEO and Dave Deno our CFO. They will both follow with remarks and we will then take your questions. I will turn it over to David Novak.

Thanks, Tim, and good morning, everybody. I'm pleased to report that Tricon, soon to be Yum brands, had an outstanding first quarter. Our operating earnings per share was up 37 percent. Basically, we hit on all cylinders. We had double digit profit growth internationally and across our portfolio in the United States. Portfolio blended same store sales results in the United States were the best since 1999. Up five percent. Our worldwide restaurant margin was strong at 15.6 percent. Given the broad based momentum of our business, we expect strong results in the second quarter as well growing ongoing operating EPS in the 14 to 19 percent range. We are confident our international business will continue to grow at least 15 percent in profits. And each of our U.S. brands is well-positioned to grow same store sales at least two percent for the full year. U.S. portfolio same store sales should be up about three percent for the year. We expect to hit or exceed all of our development, comp sales and margin targets. As a result, we are raising our full year ongoing operating EPS forecast to $3.63 to $3.70 from the previous range of 3.56 to 3.63. We are also pleased to report that our A&W and Long John Silver acquisition is proceeding smoothly. In fact, we expect to close the deal within the next couple of weeks. We are very excited to bring these brands into the fold. Our A&W and Long John Silvers multi-branding sales and profit results with Taco Bell and KFC continue to be outstanding. And the acquisition allows us to scale multi-branding on a national level over time. You may recall that average unit volumes increased 20 to 30 percent and EBITDA increases of 30 to 50 percent with our multi-branding combinations with A&W and Long John Silvers. As we have shown you before, multi-branding allows us to reimage the U.S. system to a much more contemporary and appealing format as we open new restaurants with higher returns. With the acquisition, we are looking forward to our name change from Tricon to Yum Brands. We think it better reflects our expanding portfolio of leading brands going forward. The acquisition was a key event as we continue to execute against our strategy of leading in multi-brand innovation. Another equally important event in the first quarter related to our strategy of becoming a top tier restaurant operator. We remain very focused on improving the customer experience in our restaurants. As we previously announced we launched our long-term commitment to customer mania training. Our goal is to train each team member how to be customer maniacs, which we define as executing the operational basics, what we call CHAMPS, which is cleanliness, basics, hospitality, accuracy, maintenance, product quality and speed. We want to execute CHAMPS, and do it with a "yes" attitude. In fact, we are empowering our team members to solve customer problems on the spot without asking permission from their managers. The initial training is generating a ton of enthusiasm and we believe our long-term commitment to customer mania will ultimately drive consistently positive customer experiences and lead us to become a top tier restaurant operator. We just begun all the training -- this training in our company stores and have the vast majority of franchisees on board because the program training -- training makes so much sense. I was just in Amsterdam last week with our European franchisees where we're rolling it out and everybody is excited about what we are doing with our team members and they believe it will give us a competitive advantage going forward. Going forward you can count on us to remain very focused on our two key strategic objectives. Number one, and that's international expansion, driven by our two global brands, KFC and Pizza Hut. Our restaurant counts are up seven percent over the past 12 months internationally. We have had system same store sales growth for 15 consecutive quarters. As I said earlier, you should expect 15 percent growth in ongoing operating profit each year from our international business. Our visibility on this is very high as we go into the future. Number two, our second opportunity is to accelerate the growth of our U.S. portfolio. We'll drive the U.S. growth by improving our restaurant operations, supported by customer mania, leading the way in multi-branding invasion which we just scaled through our recent acquisition. And, we will continue to lead the industry with superior marketing and product innovation. With the financial discipline that has been instilled in our company in its processes, led by our CFO Dave Deno, I can assure you thar we will also remain focused on maintaining a strong balance sheet, generating substantial free cash flow, and maintaining our industry-leading return on investment capital. We are very proud our return on capital is leading the pack and we intend to keep it that way. I'll give you a little more color on what's going on with your international business and each of our three brands after Dave Deno gives you the financial review and details of our Q2 forecast. We'll then answer any questions you have. Dave?

Thank you, David. By any measure, comp sales, unit development, margins, productivity control and our structural costs, the first quarter was a terrific quarter. Even better than our fourth quarter of 2001. Ongoing operating EPS was up 37 percent operating earnings were up 41 percent. This was better than we expected mid-quarter when we raised our expectations. Essentially our international business performed better than expected. U.S. margin performance was exceptional. Our tax rate was slightly better than expected. Q1 revenues increased 7 percent. This is the best quarterly growth we produced since becoming a public company. More of what you will see in the future, especially now that our refranchising program is largely complete. Both our international and U.S. businesses performed well with solid double digit increases in ongoing profit. We continue to make good progress in reducing our structural costs: tax, interests, and overhead. Overall it was a great way to start the year. And given the broad based strength in our operating performance, we have given guidance for Q2 which is higher than most of you expected, and we increased our guidance for the full year. More on that in a few minutes. First let me take you through Q1 in a little more detail. Looking at international. As I mentioned our international business got off to a very good start, even better than we expected and helped us exceed expectations. In local currency terms, revenues increased 13 percent and ongoing operating profit increased 16 percent. In dollar terms, international profit was up 11 percent. We were very pleased with this performance considering the shift of the Chinese New Year holiday to Q2 this year. This impacted growth rate by several points as did foreign currency for Q1 which had a negative impact of $4 million. Goodwill amortization elimination benefited the quarter by approximately four points of growth, right in line with prior guidance. Our international revenue growth continues to be fueled by solid growth in new restaurants and the 15th straight quarter of system same store sales growth. Net growth in new restaurants is currently running at 7 percent annual rate, slightly ahead of our five to six percent target. We have the sweet spot in this business of same store sales growth and good distribution growth. Our major businesses in China, the U.K., Canada, and Mexico all had strong performances in the quarter. In the earnings release the company's four high growth, high investment markets, China, Mexico, Korea and the U.K. are doing very well in their focus of expanding the KFC and Pizza Hut brands, leading the way in restaurant growth. International restaurant margins increased 7/10ths of a percentage point. Our performance continues to improve sequentially. That should continue the balance of the year. Importantly our large Taiwan acquisition of last year's fully integrated and performing well. We are very focused on margin opportunity remaining in our business and are confident our teams will may go the necessary progress to make further improvements the balance of the year. Turning to the United States. Our U.S. business had an exceptional quarter with strong comp sales growth and excellent margin performance. All three unit brands have mad progress in differentiating their brands and operational measures. We are confident of continued progress in these areas by each of the brand teams going forward. David will talk about each brand shortly. For the first quarter U.S. revenues grew six percent while ongoing operating profit increased 25 percent. As you saw in our earnings release company same store sales increased five percent in the quarter. Importantly, our franchise systems performed equally as well or better. For KFC and Pizza Hut, franchise comps were several points ahead of company results of the for example Pizza Hut franchise comp were up six percent in the quarter which is excellent performance for the Pizza Hut brand. Taco Bell franchisee performance was similar to the company's positive eight percent results. Overall, as I said earlier, we have a very broad based operational performance momentum. Now, let's look ahead for a minute. We are very focused on the consistency of performance in our comp growth, particularly from a U.S. portfolio perspective. Within the brand portfolio you will see some swings from time to time primarily at Pizza Hut. They remain very focused on their successful innovation strategy with the launch schedule of new products, not necessarily timed to match prior year successes for obvious competitive reasons. Personally I watch more closely the performance to forecast so I don't get excited when I see plus sevens or minus fours. The important measure is at least plus two for the year which is what we continue to expect for Pizza Hut. David spoke of the customer mania training we launched in Q1, which will become a permanent YUM feature every quarter for all 725,000 team members around the globe. This, as well as the other key initiatives by Alwin Lewis, our Chief Operating Officer, will be a key driver to producing consistent customer experiences in all of our restaurants every day. It is in areas like this that we are investing some of our overhead. We are very aware everyone is targeting to raise their gain in QSR. We remain focused of being a top tier operator. Looking to the future now, when you consider the strong capability we have in brand differentiation and product development in our category leading brands, the intense focus of improved operations, along with our multi-branding opportunity, our confidence in consistently growing the U.S. business is high. Now, let's turn to the second quarter. With excellent momentum carrying into the second quarter, we expect very good performance driven by particularly strong performance from our international business. I think it's safe to say our forecast is well ahead of most of your expectations. As I give you the details of the second quarter forecast please note these numbers include the impact of the YGR acquisition unless I note otherwise. We expect ongoing operating EPS of 83 to 87 cents for the second quarter of growth of 14 to 19 percent. We expect revenue growth of nine to ten percent. Six to seven percent excluding the YGR acquisition. Let's now talk about what makes up this growth. Our international business will have a terrific quarter. As I said earlier, and in our original Q1 guidance the slip in timing of the Chinese New Year shifts several points of growth from one to Q2. That fact combined with continued very good growth of new restaurants, system comp sales growth and margin improvement leads us to expect mid-teens growth from international and 30 to 35 percent growth in ongoing operating profit for the quarter. These numbers include the slight negative impact of currency and are in U.S. dollar terms. Our international business is YUM's number one growth driver, going well into the future, and it continues to perform very well. Our strategy of focusing on key markets only with company operations and investment is paying off. Each of these key company markets is expected to have a very good year, especially China. We believe we have a real gem here that no one else in the restaurant category can match in terms of international growth opportunities. We have two brands with extended visibility for expansion, infrastructure in place, and experienced team of internationalists to make it happen. This is our largest division and it's growing very, very well. Turning to the U.S. For the second quarter in the U.S. we expect continued solid performance. Ongoing operating profit growth of 10 to 12 percent driven by two to three percent growth in portfolio blended same store sales and another good quarter in margin performance and G&A productivity/. The YGR acquisition adds about two points of operating profit growth for Q2. Let me just say at this point, for the year when you include interest expense, we still expect the YGR acquisition to be slightly diluted. From a comp sales perspective expect Taco Bell to have the best results in Q2 continuing our recent trends, fairly good results at KFC skewed somewhat to the end of the quarter and a modest but expected decline of Pizza Hut, as they lapse the successful launch of Twisted Crusts a year ago. We expect Period Five will be Pizza Hut's low point on comps for the year. The second half will likely be Pizza Hut's best for comp growth. Once again, we expect Pizza Hut comps to be up two percent this year. Turning to Tricon overall, We expect continued top tier performance in restaurant margins with one full percentage point improvement versus last year to 15.5 percent. Our structural costs will continue to be tightly managed. G&A will be up about four percent in dollar terms for the quarter, excluding the YGR acquisition. Excuse me excluding YGR acquisition G&A will be up only about one percent. We continue to make very good progress in overhead productivity, while at the same time investing behind our growth opportunities: international expansion, multi-branding and improved operations. The ongoing tax rate will be in the range of last year's or somewhere between 29 to 31 percent. Our tax group continues to work on key tax planning strategy, including the full foreign tax credibility and timing remains up in the air. Please remember our tax opportunities tend to come in large blocks and the timing will vary. We are working hard on these initiatives. Interest expense will be up slightly in dollar terms versus last year's second quarter. If you exclude the YGR acquisition interest expense will be about flat for last year. Again all this adds up to 83 to 87 cents in ongoing operating EPS for the second quarter or growth of 14 to 19 percent. Revenue we expect to grow nine to ten percent. The YGR acquisition contributes about three percentage points to revenue growth. Finally let's look ahead to the full year. There is no doubt we are off to a great start with expectations for a terrific first half. We feel very good about the momentum in the business and importantly plans for the second half. That is why we have increased our full year guidance and ongoing operating EPS to a range of 3.63 to 3.70, from 3.56 to 3.63 previously. We are confident of this new range as we look add the performance and plans of our international team and the three U.S. brand teams. They have all made very good progress against our key strategies. We expect they will make more progress going forward. In assessing our full year forecast please remember our comparisons get tougher as the year progresses, and that we had a very good fourth quarter last year. Also as David mentioned earlier the acquisition of the Long John Silvers and A&W restaurant brands is going smoothly and should get off to a good start somewhere in the middle of the second quarter. Finally, as David discussed earlier we are very focused on maintaining a strong balance sheet and expect to continue to generate high levels of cash every year, more than enough to fund our capital needs for growth and restaurant upgrades. At this point let me turn it back to you, David.

Thanks, Dave. Thanks for doing your usual good job of detailing the numbers, identifying our challenges and explaining why we are taking our full year forecast up to the range of 3.63 to $3.70 in ongoing operating earnings per share. Let me now share with you the key company initiatives that will drive our performance for the balance of the year and into 2003. On the international front, Pete Bassey and his team intend to open another 1000 plus new restaurants this year. We continue to focus and invest the bulk of our capital in four high growth, high return markets for the company; China, Mexico, the U.K. and Korea. Franchisees continue to open nearly 70 percent of our international new units in countries around the world. We will continue to strengthen company operations focus and our partnership with great franchisees. That's why we agreed to sell our Singapore business to Malaysian Holdings, one of our strongest operating franchise groups in the world. In the base international business we are driving same store sales by launching proven new products from the U.S. like Popcorn Chicken and Pizza Hut's latest pizza innovations. P'Zone is in Canada as we speak and doing extremely well. Our core countries are performing well and China is having an absolutely sensational year. In the United States, our number one focus at each of our brands is to get better at running rate restaurants. We are executing a common operating approach which is spear headed by Alwin Lewis, our Chief Operating Officer. First quarter measures continue to improve at each of our companies for CHAMPS, turnover and margins. We know we have a lot more upside, but we do know for certain we are making progress. Let's look the the brands. Emil Brolick and the Taco Bell team have recorded 30 straight weeks of positive same store sales growth. We realize we have not been lacking the toughest comparisons but Taco Bell has been positive the last eight periods and two year trends are now positive. Taco bell will continue to bring news this year to the Think Outside the Bun advertising campaign and benefit from the quality improvements we have made in tortillas, beans and beef and the addition of steak and 100 percent white meat chicken to our line. Taco Bell is also benefitting from operational improvements and significant gains in speeds of service. This has been our focus. In the first quarter our speed of service times improved by nearly 10 percent from a year ago. Or more than 20 seconds better. We know that that drives sales. Taco Bell is also coming off a very successful steak quesadilla launch, a $1.99 product that was advertised without mentioning the price point. Right now Taco Bell is featuring value with the new 7-Layer Nachos for 99 cents, and we have a steady stream of high quality product news and value news planned for the balance of the year. We expect Taco Bell second quarter same store sales to be up at least 7 percent. Taco Bell is definitely building on its momentum. Now, let's turn to KFC. KFC has been a real model of consistency. KFC same store sales have been positive 15 out of the last 16 periods and seven out of the last eight years. Cheryl Bachelder and the team will continue to position KFC more competitively on the basis of superior quality to fast food with the successful Jason Alexander advertising campaign. Operationally, KFC's focus on Hot and Fresh is driving continuous improvement in our food quality scores. The plan is to drive continuous product excitement around our existing menu and to launch significant packaging and sizing innovations to improve our overall value equation. We have successfully tested programs and we have those programs in the pipeline, and we expect to continue our momentum with stronger advertising budgets that allow us to support both the Family Meals, Chicken on the Bone and Individual on the Go products. We expect KFC's Q2 same store sales to be up two percent. Very, very confident about KFC's future as we move on. Now let's turn to Pizza Hut. As you know Pizza Hut as had a soft fourth quarter or had a soft fourth quarter in 2001. But with the launch of the P'Zone, Pizza Hut reversed that negative trend and generated two percent same store sales growth in company stores. As David said, franchise same store sales were up six percent for the quarter. Now, you are probably asking why would there be such a difference? Well, the P'Zone was a very popular dine-in product because of its low price point and individual eater appeal. Now, if you'll recall the company restaurant base is primarily delivery driven with delivery carry-out units. The delivery carry-out business is driven primarily by traditional pizzas, whereas the franchisees have more of a Red Roof, dine-in asset base. Overall acceptance in product mix for the P'Zone was outstanding, exceeding expectations. The P'Zone attracted new customers at a better rate than many previous Pizza Hut new product launches. Company stores sales were less than expected because delivery sales are driven more from our base pizza business, because, basically what we are doing is serving up whole meal replacement options with the pizza. The good news is that with the P'Zone, we have another great pizza in our arsenal of limited-time offers, and we know the best way to market it is in combination with our base pizza line. So in other words, sell our base pizza and the P'Zone together and we think that would give us a more powerful marketing program. We are pleased for the franchisees we were able to drive significant sales in the dine-in business. At the same time, obviously reverse the business trend that we had in the fourth quarter. We are also very pleased that Pizza Hut had a great profit quarter with less discounting on the base pizza line which impacted traffic, as we talked about, but clearly supported great margins. We are also pleased that Pizza Hut improved its delivery speed of service and other key operational measures during the launch. The balance of the year Pizza Hut will bring back previously successful limited time offer pizzas and introduce an outstanding new product that we have successfully tested. Right now Pizza Hut is overlapping the very successful Twisted Crust Pizza and Period Five sales will be down about seven percent. We expect they will be down about two percent for the second quarter and we will finish the year with a very solid second half ending the year up at least two percent. We are confident that Pizza Hut is back on track and that the team has the winning strategy in the pizza category with quality, pizza innovation and offering every day value while focusing on continuous operational improvement. We love being the innovator in the pizza category. We are definitely off to a strong start when you look at it all and step back, you have to, I think anyone would conclude we are definitely off to a strong start at all of our companies and fully intend to keep it going. We have taken up our forecast and expect to hit it. But let me remind you it's still early and we have some more tough sledding ahead. We are comfortable we can deliver in the range of $3.63 to $3.70 for the full year but believe it would not be prudent for you to bank on us to do more. If we can do better, we will. We are committed to keeping you advised fully along the way. Before I close, let me spend just a minute on how acquisitions fit into the execution of our strategies in the future. First, and foremost, we will leverage our existing U.S. asset base in international infrastructure. This will be through, number one, QSR mid-scale opportunities in the U.S. to drive multi-branding. Just like the A&W, Long John Silver's acquisition we just completed. We will also be testing casual concepts through partnering agreements that will fit with our U.S. brand assets, particularly Pizza Hut dine-in assets. You'll see this in a test we have with Backyard Burgers and Pizza Hut dine-in restaurants as we look at upgrading the image of Pizza Hut Red Roof restaurants. We are also looking at testing pasta and sandwiches for this same opportunity at Pizza Hut. We are also looking at these and other food categories that could leverage our Pizza Hut delivery system. But we basically think that fast casual gives us an opportunity to maybe plug and play with Pizza Hut. We'll see what happens. The great news here is we are able to test this, find out if it works. When we know we have a winner, then we can decide what the best option is for us as we go forward and determine the absolute best use of our capital. The big news is we are leveraging or existing asset base, which we know drives shareholder value in a big-time way. We will also look at international expansion of any promising multi-brand combination or single brand opportunity that allows us to utilize our existing infrastructure. What we have internationally is really special. I mean, you know as we have talked about when you look at McDonald's and you see how much profit they are generating outside the United States, $2 billion. You know, we make over $300 million and, you know, we are quickly heading towards the four category on that. And the real opportunity that we have is to close the gap versus McDonald's, knowing the next nearest competitor we have makes only about $30 million a year. We have the infrastructure to really start continuing to really drive our international businesses as we move ahead. The going forward, you know, we really think we can execute whatever acquisitions we make we think we can successfully execute our strategy through small investments and test them and then expand them as they prove successful. We think this is a real luxury we have. And again, our primary strategy is to leverage existing our asset base through multi-branding. Overall we think this strategy is the best way to drive shareholder value and stay focused on our existing business. When we look at what are we going to be the best at as we go down the road? We are going to be the best at really bringing customers branded restaurant choice. I mean this is a tremendous break-through strategy that we have. We're going to be the best in the world. We are looking at this holistically from a worldwide standpoint. So with that I will open it up to you for any questions that you have. Dave will answer all the tough ones and I'll take all the softball.

Okay, sir, we are ready for questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A rosters. Your first question comes from Coralli Winter.

Hi. Could you talk about the -- a little bit more specifically about the performance in your largest international markets? What same store ranges look like for China, Mexico, Korea and the U.K. And what the competitive dynamics you see in Europe versus Asia. And then secondly could you provide guidance on where you see U.S. restaurant margins and international restaurant margins for the year.

First of all we don't disclose by country our same store sales growth. But we are really happy with sales gains in the countries that you identified. The U.K., Mexico, China, et cetera. And Coralli, what's happening is you are getting base same store sales growth plus we are getting new unit development. And when both of those things happen in a particular geography, it adds up to a lot of profit growth. As far as the dynamics go in the competitive set, David's mentioned that the continent of Europe for us for KFC is a provider. We do not have the kind of scale we have in Asia. And we are continuing to work against that and spend against that. In Asia continues to be a very, very strong focus for us going forward. And then finally, on the U.S. margins and the international margins, we expect both to be in the high 15's for the year. Very, very good year for us going forward. So the U.S. margins, specifically we expect in the high 15's. International margins we expect to be in the mid to maybe high 15's for the year.

And the U.S. number includes the YGR acquisition.

And Coralli, I think one other point on just the competitive dynamics internationally. In Asia, in many of the companies -- countries we operate in we actually beat McDonald's and have a, you know we go tow-to-tow with them. In Europe we are basically in the process of building the business with McDonald's being our -- the lead horse that I think is basically educated the category on fast food. So we'll ride their coattails and try to make progress as we go forward.

Thank you.

Thanks, Coralli. Next question, please.

Your next question comes from Mark Kalinowski.

Hi. Good quarter everybody. Just wanted to get your comments regarding your outlook for cheese prices that's embedded in your Q2 EPS target. Thanks.

We have, mark, the traditional cheese curve which is a little bit less than last year, but it tends to strengthen as the year goes along, the prices. But nothing really -- no real big change in our cheese costs or, you know, versus our usual trends.

So you would say it's accurate to describe a slightly favorable outlook on a year-over-year basis?

Very slightly favorable. Again, I want to stress to everybody that our commodity costs are very balanced between chicken, beef, cheese, other items. We do not see a significant upside from cheese because it is a relatively small amount. Also its doesn't make up a huge, huge part of our portfolio.

Thank you.

Thanks, Mark. Next question, please.

Your next question comes from Michael Sherik.

Thanks, guys and good morning. Could you comment a little bit -- You talked about boosting some of the advertising at KFC. Can you talk about advertising spend on an absolute dollar basis and also from am appreciation standpoint in terms of where you are today? And then secondly, your guidance for international operating profit growth, this go-round includes the impact of FX, can you let us know what your assumptions are for that?

I'll answer the second question first, $9 to $12 million of FX impact for the year. There was four in Q1. So, you know, hopefully the proportionate share happened in Q1 and those of you that follow the dollar know that it's the dollar's weakened a little bit here lately. But it is what it is and we always carry a little bit of a contingency for that. On advertising spend, Michael, what we have talked about before is some of our brands like KFC have some of our franchisees have matched our investment spending to a half a point, and that's enabled us to increase our add impressions in those -- in that brand. The media market is more favorable than it was a year ago. I don't have right off the top of my head how many more impressions we are getting but at KFC advertising spend is higher as a percent of sales than in the past because to the investment spend match. I believe -- we can double check on this, but I think Pizza Hut and Taco Bell are roughly the same as last year. We are getting more impressions because of the more favorable media markets.

Thanks, Michael.

Your next question comes from John Glass.

Thanks. Good morning. Couple questions. One, on the Yorkshire acquisition, can you walk through how the acquisition will impact the second half with respect to [acreation] to operating profits? I think you said it was two points of growth in this quarter, but we only caught a partial quarter of that, so if you could provide that detail. And then secondly on the multi-branding units, how many multi-branded units are in the comp base now? If you have looked at it versus the average blended comp for the system, how big of a delta are you seeing multi-branded versus single brands in the comps?

As far as the Yorkshire guidance goes, as I talked earlier in previous discussions, we expect when you include interest expense, we expect a slight negative in operating earnings this year. We expect some operating profit increases for the back half of the year. I think it's three to four points as far as, yeah, on the U.S. only. And about three to four points in operating profit. So we expect Yorkshire to come on in the next couple weeks. We include the guidance for the second quarter. Let me just clarify it for everybody, it's not the reason why we took our operating earnings per share range up. It's off of our base business. We expect the Yorkshire to have virtually no impact on operating earnings per share. So that is the Yorkshire piece, and we will continue to update you on that as the deal closes and we get better understanding as to what's going on in that business. But you can expect about three points in U.S. operating profits from it. The multi-brand restaurants, there's not enough of them today in our full system to have a measurable impact on the comp sales performance. If you look at how the restaurants themselves are trending on a comparable sales performance, they are trending equal to or better than what we currently see out of our single brand restaurants. Two-part answer to your question. We have a slightly better comp sales performance out of our multi-brand restaurants. When you look at it in aggregate for all our U.S. brands there are not enough multi-brand restaurants to have a measurable impact on our comp sales performance.

John, also on YGR so all of you who have questions about YGR, balance of the year we are expecting it to begin impacting our P&L Period Six, so, the last period of Q2. Keep in mind it's about $575 million annual revenues. Margins were about four percentage points below ours. And G&A is about $5 million a period. Something around that range. That should give you enough to pretty much model that out.

Thank you.

Thanks, John.

Your next question comes from Peter Oaks.

Good morning. I was actually hoping to follow-up on the multi-branding question of John's. Dave if I understand, you are saying the comps for the multi-branded units were only equal to or slightly better than the single branded un its?

When you are looking at -- Peter, I'm not talking about the first year. Okay? I'm talking about once they are in the ground and they are in the ground for at least 13 periods. That -- comp sales performance is equal to or better than what you are seeing in our base branded restaurants. First year we are still seeing that sales gains that David talked about 20, 30, 40 percent. So I just want to make sure that clarification comes in.

So this would, of the approximately 1600 multi-branded units or slightly under, I think you had about 1100 a year ago. This would essentially isolate those folks?

Yes. What we always do is we take a look at how we are doing in the first year sales, Peter and then importantly how we are doing after that.

One of the things we were most pleased about with multi-branding is it solidifies the economic power of the restaurant on an ongoing basis because what we find is our same store sales growth are actually higher in the multi-branded units, because you are leveraging two customer bases which really drive purchase frequency. In our overall strategy the real economic engine for us is to drive purchase frequency. That's why we think variety, that we can get credit for, which multi-branding gives us immediate legitimacy in different food categories is the key to driving purchase frequency. When you get more customers coming in, it raises the whole boat. That's the power of this. So we are very pleased that we have a strategy that is long-term in nature. It would be one thing if you got the big lift in year one and year two the sales went down. We don't see that. We see the sales outpacing our stand alone brands.

Given how important multi-branding is to the story, kind of medium to long-term is it your intention to provide us comps on a regular basis?

On multi-branding or on just -- we will continue to present, peter, by brand. And talk about multi-branding as we do today. But it will be included in our overall base portfolio guidance.

What we are going to give you is what our existing asset base and new assets deliver. Okay? We have a very unique strategy. Nobody else is doing it. What we are doing is we are going to win on the basis of branded choice. So, you know, our whole asset base will transform, ultimately, into multi-branding and, you know, I think at some point in time we may be multi-branding in China. We will be looking for ways to maximize variety and maximize our asset base while really responding to the customer. Because the only reason why this works is because customers love it.

Peter, your point is we continue to expand multi-branding into the future, and it gets to be a very significant scale in the U.S. The key number to watch from a comp perspective, even more so in the future than now is the U.S. blended portfolio rate rather than by brand.

Okay. Thank you.

Thanks, Peter.

Your next question comes from Howard Penny.

Hello, howard.

Hi. Thanks very much. I was curious about your comments of both Pizza Hut and Taco Bell as to the level of discounting in the quarter. Can you comment on your philosophy as it's changed over the years to discounting and was I reading you right saying there was less discounting this year? If you could even maybe go back as far as to what the discounting was like when you were part of Pizza Hut. Thanks.

I'll take the immediate question and turn it over to David. Obviously one of the reasons why our margins were so strong in the first quarter, is there are a bunch of factors, but one of which that David talked about was, we did a good job on our price points at Pizza Hut and Taco Bell, especially. I'll turn it over to David to talk about the overall philosophy.

I think, Howard, you know to win in this category, we are really focused on what we call inside, at least internally as two tier strategy, okay? You know that the category's driven by value. All three of the categories. Chicken, tacos, pizza, looking at Long John Silver's and A&W, same thing. We know this, there's a very value conscious customer out there. So we believe that we want to continually drive home, you know, competitive value offerings on an every day basis. I mean, that's just part of the business. Where we think that -- what makes our strategy different is that we have one-two punch. We have the every day value plus we are introducing higher quality type products we can get a premium on. Or more innovative products that allow us to improve our margins and still get the kind of traffic growth that we need to really drive the business. At Taco Bell great example of that would be the steak quesadillas. Literally we are bringing quesadillas at $1.99 price point, unadvertised. To think about anything going for 1.99 at Taco Bell five years ago, everybody would have been in a panic. We found that that really is a great strategy for us. At Pizza Hut most recently the P'Zone. It was a terrific product. Great customer scores. And, we were able to come in and literally not discount our base pizzas and we had a greet profit quarter and a very solid sales quarter. We would have liked to have more sales out of the company restaurants but the bottom line was it was a very successful quarter for us. It's a balancing act. Then what we are really try to go do is when you look at our marketing dollars, we are trying to figure out the best possible way to maximize our marketing spending so we can have a two tier message out there. Pulse value, come back to higher quality products, come back to value. KFC, right now, is on a two tier media strategy where we are supporting both the chicken on the bone product which is generally higher priced and our portable products which is lower priced. So we can make our product available on an affordable basis and have the high end, low end working in terms of the menu mix. That's how we are approaching it. We call it two-tier marketing. And we are very focused on trying to find the right balance.

Thanks, Howard.

Next question comes from Jack Russo.

Hi, Jack.

Thanks. Great quarter, guys.

Thanks.

Just a couple nonoperating questions, David, for you. Could we get a full year tax rate what you are expecting for the full year? And also, any thoughts on interest expense for the full year? And I know you didn't buy back any stock in the quarter. I'm curious, is that due to the acquisition or do you attempt to resume that? Finally, you have ended in the fourth quarter for Pizza Hut a new product. I know you can't talk a lot about it. Are you still expecting some type of blockbuster new product to be rolled out there in the fourth quarter?

Tax rate 33 to 34 percent. We'll continue to pursue things as we see them. Especially on the international side. Interest expense we would have expected to be about flat this year. That includes YGR, Tim?

No flat before YGR.

Flat before YGR. We have the YGR impact this year. Jack, what else did you have? Share buyback?

Do you expect to get aggressive there the rest of the year?

Yeah. We'll continue to do our -- we have a $300 million share repurchase authorization that we are executing against. We intend to keep against that.

Okay.

Then finally, on the pizza hut --

We have a great new product we are going to introduce sometime in the second half.

Second half of the year?

Yes.

Okay. Thanks guys.

No problem.

Next question please.

Your next question comes from Andy Barish.

Hi, guys. Couple of cost questions. Can you quantify or sort of at least directly let us know if the new customer mania programs were a significant cost item as you rolled those out? Where would that show up? Secondly back on cheese prices. Where are cheese prices favorable in the first quarter or was that the toughest comparison of the year for you?

It was a little higher in the first quarter. Then offer the balance of the year it will continue to moderate a bit, and be slightly favorable like we talked about earlier. I want to remind everybody we have a very -- we have other components to our food cost besides cheese. Secondly, on the second part -- first part of your question, Andy, I'm sorry?

Cost on customer mania, do you care to quantify as you roll that out?

We will not specifically quantify it. But when you see changes in overhead, we are investing in our overhead behind our CHAMPS measures, our international measures and multi-branding measures. Specifically I think our CHAMPS Excellence Review which is something we do to monitor to see our progress on CHAMPS, we are spending $6 million more this year than we have in the past. So our ongoing G&A productivity continues. We continue to look for back [INAUDIBLE] house opportunities, consolidation opportunities as we always have. And then we are reinvesting it behind our growth drivers, ops, international and multi-branding.

Customer mania training is something we plan on doing every quarter forever more. We think we are on to something here, and we are going to stay after it.

The reason you would likely not see any impact on restaurant margin is we already have training going on in the restaurants, we are better utilizing the times we spend in the restaurants for things like this. We believe this is a much better investment. You should not see impact or margins going forward. Just as a reference look at our Q2 guidance on margins. We expect to be very strongly positive.

Thank you.

Your next question comes from Brett Levy. DAVE DENO Hi, Brett.

Good morning. Just a follow-up on Andy's question on customer mania. What is the franchisee commitment? Secondly franchisee presence within the big four international markets you are targeting, what is their growth commitment? Third do you have any color you want to give, any quantitative numbers on CHAMPS scores?

I'll take the middle one, David. On the franchise split China and -- excuse me Mexico and the U.K. KFC business are company and franchise ownership. And the U.K. Pizza Hut did this as a joint venture with Woodbread. Korea is primarily company and the Pizza Hut side all franchise on the KFC side. On the company side it's pretty much all company in China. Franchise partners quite happily, are coming along with us and investing behind our brands in each one of those countries. So that's our international growth story.

Okay. Regarding the franchise commitment to customer mania. You know, first of all, the status of where we are at right now is that we are implementing this in all of our company stores around the world which is about 20 percent of the system. And we have the vast, vast majority of the franchise system executing it along with us. Taco Bell in the United States basically we have 100 percent alignment. Pizza HUT'S almost 100 percent alignment. KFC is about lagging a quarter behind the company operations but is aligned as we roll it out. And then internationally, you know, I would say we have the vast, vast majority, there's no need for me to go country by country. Basically what I told the European franchisees last week as we were going through it and they are excited about it. This is a way of life for us you are either going to be a good franchisee or a bad franchisee. If you are not on the program you have to be on somebody else's program, because this is what it's going to be all about. We are very focused on doing this. We are tracking who's in, who's not in on a global basis. And, you know we have varying agrees of execution in terms of pacing and sequencing. But ultimately our goal is to get to 725,000 team members. And we are very confident we are going to get there because this program is just being sucked up. People love it. You know, it's getting the right kind of spirit inside the restaurant. We are teaching people the right things. We have also, part of this we are empowering the team member to solve a problem right off, without going to the restaurant manager for food costs up to $10. Basically if you had a $20 problem, you know, you could literally take care of it if you are a team member without talking to your restaurant general manager. The team member says hey, you believe in me, I'm a part of the team, you trust me. You know, it's really getting our team members involved which we know really drives performance. And where we tested this, you know, our food costs are exactly the same or lower. Our customer complaints are going down dramatically. And what I'm excited about is the whole organization is galvanized and energized around this customer mania notion. It's changing our restaurant support centers. We are going, this is our real passion. This is what we are passionate about getting done, because we are tired of being bottom tier, middle tier operators. We will not be happy until we are one, two, three, four and five at the top, in terms of our operational measures. Way think it can get done. We are a long ways from where we want to be but this is fundemental. We are tracking all of our franchisees, and we're going to lead the way from a company perspective. In terms of our ops measures, you know I don't have off the top of my head the exact CHAMPS scores, but I think Tim does. We are basically improving our measures, we just had our quarterly business reviews. You know, turnover is moving in the right direction in all of our brands. We've got customer mania under way. Consumer complaints are down. And, you know our CHAMP scores are moving in the right direction.

Yes, Brett CHAMP scores are up anywhere from up slightly to up as much as four points at Taco Bell. Some of the key measures like for example David mentioned earlier the speed of service at Taco Bell. They were better by 22 seconds in the first quarter alone. Pizza Hut one of the key focuses is on delivery time as promised. The percentage of transactions that have met that time is up eight percentage points over a year ago. Better than 10 percent. And then on KFC the focus on Hot and Fresh product they are up about eight percent in the -- particularly on their product scores on CHAMPS.

The other thing we are doing around the world, is we are testing in each one of our brands and in our countries, we are testing what we call catalytic mechanisms. Things that guarantee great service. You are not happy? You get your money back. Just ask in the U.K.. You have any issues? Just ask. If we don't solve your problem, we'll give you your next -- we'll give people the balance back coupons for discounts on their next purchase. We are really try to develop things that put teeth into driving great service. And I think the goal is by mid-year of next year we will have some standardized service programs we can roll out around the world as well. We're just attacking our whole service system in a way to say to the customer we are more committed than anyone else to their total satisfaction. Again, I'm not sitting here taking any victory laps. The rude reality of this is we are not where we want to be. But I can tell you we are very, very focused on getting where we want to be.

Thanks, Brett.

The next question comes from Joe Buckley.

Hi, Joe.

Hi. Just a couple more cost questions. One, are you [comments] chicken cost trends and maybe what kind of wage rate inflation you saw in the first quarter. And then, just a question on multi-branding, whether, as you approach the closing of the Yorkshire deal your priorities are shifting in terms of what direction you want to go, what combinations. Lastly McDonald's just announced a potential deal with Fizoles. I'm kind of curious if that's a concept you kind of looked at as a potential partner for Pizza Hut?

Answering the chicken and the wage rate questions. Chicken, we expect to be roughly flat. We see no real changes. Wings are getting a little more expensive, but nothing really hitting our P&L too hard. Wage rates pretty much standard. Three to four points up. Nothing really up or down there. On the Fizoles transaction, we don't comment on things that we do or don't look at. We do have a group that looks at various concepts. We don't get specific into anything we have or haven't looked at. I'll leave that as a no comment.

Regarding the yorkshire acquisition we have or marketing under way. We are assessing what the best avenues are for us to excite more commerce through multi-branding. We really don't have anything new to report in terms of what our priorities are versus Long John Silver and A&W and how to use it. We talked to our franchisee's are basically clamoring over the idea, which is the best news of all. The phone is definitely ringing off the hooks which we feel very, very good about. This has a lot of traction, a lot of excitement. And again, the main thing here is, there's no need for us to hurry into anything. We are not into winning the race here. We want to build a great company. We know we have great strategy. So we want to execute this right. Okay? So, you know, we are going to take our time easing into this acquisition and figuring out the best way to go. We are going to have very planned [for] growth as we go forward.

Thanks, Joe.

Your next question comes from John Ivankoe.

Hi. Thanks. Two questions if I may. The first, we look at Pizza Hut's international business and I guess focusing specifically on delivery. Could you comment on the state of usage, you know, of that business and what the opportunity may be both in Asia and Europe? And secondly, if I may, David Novak, following up on a comment you made. What segments do you think, outside of what you are currently doing are available for international expansion? If you could comment on that would be an interesting thought. Thanks.

I'll take the first one then I'll turn the second one over to David, John. On Pizza Hut International we have some counties that do extremely well. We have segments of Asia, parts of Europe, especially the U.K. that do very, very well. Obviously much like pizza delivery in the United States back in the 70s and '80s, you do have to teach people that customer access point. We are working that. But some parts of the world, especially U.K. and Korea are very far along. We do quite well there and we are continuing to expand pizza delivery in all of our major markets, you know Canada, Australia, the European theater. Everywhere in those areas we believe we have a business model that can be expanded either company or franchise development.

I think when you look at the segments that we think we could potentially penetrate internationally, you know starting with the fact that we basically are in two segments today both chicken and pizza. That gives us lots of opportunity. We think that Mexican food is a segment that will have relevance over time. But we believe it's a nitch category, and that the best way we'll be able to drive Mexican food is in combination with another brand. We are excited about having fish. You know fish, particularly in the U.K., Asia, Latin American countries, we think that the fish segment is totally untapped. But, again, we have to determine whether it can really drive enough volume for single unit economics to really work. But, again, our strategy is multi-branding. I think where we can move into these nitch categories is when we combine one or two together. That's why we are happy about Long John Silver because it gives us an opportunity to team up with Taco Bell or potentially leverage our asset base with chicken as we go down the road internationally. You know, I think the hamburger segment for us is -- it's untapped for us which A&W gives us an opportunity. And it also gives us a dessert. They have an incredibly good line of hard packed shakes that are absolutely delicious. So, you know dessert is a big opportunity internationally and something we really don't have. When you think about in combination of how do you go to market against a McDonald's, maybe in continental Europe. KFC, A&W is not out of line for us. We think that might give us a break through type of approach we'll learn about going forward. We are also down the road, I mean we are very intrigued by what's going on with Asian food. We think Asian food is a category that we may have an opportunity to move into which could also be something we that could use to leverage our delivery asset base as we go down the road. But, you know, I think we are kind of thinking outside the dots, you know, by thinking really about what the customer really wants. And they do love choice. And, you know, our goal is to try to bring this choice to them in an exciting retail format. And that's really what we are working on and galvanized around. If you look at China, for example right now China is rocking and rolling. It's just -- we are opening up great restaurants, our [hurdle] rates are phenomenal. But I think, you know, five years from now, six years from now when those great restaurants are doing great, we may need to provide the customer more choice. All right? So rather than introducing a fish sandwich that no one could give us any credit for in China, okay? We could introduce maybe Long John Silver and have a whole new line of products we could get a lot of credit for and take China to the next level. That's conceptually how we are thinking about this. We are very, very excited about it. It takes a category that people describe as competitive and tough which it is, but it gives us some real headway as we go forward.

Thanks, John. Next question, please.

Next question comes from Jeff Amahandro.

Good morning this is John White for Jeff. Question is with regards to the Yorkshire acquisition. How soon do you expect to grade the A&W and Long John Silvers concepts on CHAMPS? Where do you expect them to stack up?

You no, I think that we'll do that within the next year, you know? I have talked to the franchisees. They are excited about our operations programs and our people programs. We are bringing them a capability they would be the first to say they really don't have. So we'll want to get them on the customer mania CHAMPS Excellence Review, CHAMPS program as soon as possible. I think we have, you know bottom, basis what I have seen in the -- our research, I think we are in bottom middle tier. You know, middle tier at best with both A&W and Long John Silver. But, again I'm not trying to sound like Pollyanna here but if there weren't things that you could go out and fix you wouldn't have growth opportunities. I think we can take the business forward by improving our operations as we move ahead.

Thanks, John. Next question, please.

Next question comes from Mitch Spizer.

Hello, Mitch.

Terry can we have the next question?

At this time there is no response from Mr. Spizer's line. He must have withdrawn his question. The next will come from Paul Luster.

Hi, Paul.

Can you quantify your turnover rates and the hourly manager level? Second on the Yorkshire was wondering if you were thinking any differing outcomes in urban versus suburban locations, perhaps, or maybe some geographic areas. And lastly any update on technology implementation on supply chain or maybe store level? Thank you.

Paul, I'll take the first question on turnover. Basically Taco Bell is in the 150, 160 area. This is team member turnover which is what we are primarily focused on, as well as our [INAUDIBLE]. Team member turnover at Taco Bell is 150, 160 which is down 30, 40 basis points over last year. KFC's into about the 120, 130 range. Which is down 50 to 60 basis points over last year. Pizza Hut in the 100 to 110 area which is about even with last year.

And I just want to add. Our international markets we don't have those with us but tend to be significantly lower than that in turnover both in manager and team member.

And I think when we look at our -- the success and the earnings we have had on trade area basis, urban, rural, suburban, we did that testing prior to the acquisition, and we got green lights in all three of the areas. I think, frankly the thing we will have to learn over time is just how -- what's the best way to maximize a whole marketing area. For example, can we have units a mile and three quarters away and 40,000 population or is the stretch of the brand 50,000? The other thing that was really interesting is that, you know, what we are doing with this acquisition is we are also strengthening our appeal with the Hispanic audience. Long John Silver is the number one ranked quick service restaurant chain among Hispanics according to the research we have seen from the Long John Silver folks. So again that's one of the reasons why, back to the earlier question, we think in catholic countries for example we have a tremendous opportunities, Hispanic countries with seafood.

And finally on technology that is one area where we continue to be more productive we are re-investing in our tecnology and systems to enable even more productivity, both in the back of the house, in our restaurants and here in our restaurant support centers to continue to streamline especially our financial systems.

Thank you.

We have time for one more question.

The final question comes from Terrance Wheat.

Yes. In terms of -- you talked about your investments and doing small acquisitions and investing in them staying focused driving shareholder value. In light of that, can you comment on any of your thoughts on Burger King?

We will not comment on Burger King other than the fact that it's a great brand. I think they are marketing challenges are pretty well documented.

And we did not -- there was a bid process on Friday, we didn't bid. Beyond that we are not really commenting.

Okay. Thank you.

Thanks everyone very much for attending the call.

This concludes today's Tricon Conference call. You may now disconnect.