百勝餐飲集團 (YUM) 2002 Q2 法說會逐字稿

Good morning.

My name is Charlene and I'll be your conference facilitator.

At this time I would like to welcome everyone to the Yum!

Brands 2002 second quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's 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 key pad.

If you would like to withdraw your question, press the pound key.

I would now like to introduce Mr. Tim Jerfis, Vice President of Investor Relations for Yum! Brands.

Sir, you may resume your conference.

Thanks, Charlene.

Good morning everyone and thanks for joining us on the call. Before we begin, I'd like to go through a few of the necessities.

This call is being recorded and will be available for play back, as always.

We are broadcasting the conference call via our website at www.Yum.com.

Please be advised that if you ask a question, it will be in both our live conference and in any future use of the recording.

I would like to advise that this conference call may include forward-looking statements that reflect management's expectations based on currently available data; however, actual results are subject to future events and uncertainties. Information in this conference call related to projections or

Other forward-looking statements may be relied on, subject to the Safe Harbor Statement included in our earnings release and may continue to be used while this call remains in the active portion of the company's website which will be until our next quarterly earnings conference call.

I will tell you today's agenda--today's call; we have David Novak, Chairman and CEO of Yum! brands, David Deno, our CFO, and Alwin Louis is joining us today--Yum! Brands Chief Operating Officer.

All three will follow with remarks and we will then take your questions.

With that I'll turn it over to David Novak.

Thanks Tim, and good morning, everybody.

Despite all the uncertainty in the market, one thing you can be certain of is that Yum! Brands is having a very good year.

You've seen the earnings release and we obviously had an exceptional quarter.

Up 24% in operating earnings per share versus a year ago.

Highlights include record revenue growth in international, record world-wide margins and 3% branded same-store sales growth in the United States.

Momentum is continuing in our third quarter on a world wide basis and we've taken our full year forecast up as a result of that.

We went into the year saying 2002 would be a year of revenue growth and we are delivering.

Based on what we know today, 2002 revenues will be up at least 6-7% for the core business and 11-12% including the acquisition of Long John Silvers and A&W All American Restaurants.

More importantly we are confident we can achieve at least 10% operating EPS growth next year and beyond because number one, our international growth engine will continue; number two, we'll continue to ramp up multi-branding to accelerate U.S. growth, and number three, we are improving our operations.

We also now have continuity in management and key processes and have established real discipline around cost structure driving productivity in both the restaurant and G&A costs.

Importantly we have experienced 100% dedicated teams at each brand focused on differentiating their brand in everything that they do.

Let me give you a brief perspective on our portfolio before Dave Deno takes you through the numbers.

Our International business is well ahead of target.

International is a major growth driver for us, accounting for basically half of our growth each year.

We have a very unique opportunity and are executing the kind of new unit opportunity that McDonalds had 10-15 years ago.

We'll open another 1,000 new units in 2002.

In addition, we just achieved our 16th straight quarter of system-wide same-store sales growth.

This year, our ongoing operating profit growth will be at least 20% and we will grow our international ongoing operating profits of at least 15% each year going forward.

One of the things we are really proud of is that our international profits this year will approach $400 million and that's compared to just $170 million in 1997.

On the multi-branding front, this quarter we acquired Long John Silver and A&W to dramatically increase our multi-branding opportunities in the U.S. and ultimately around the world.

KFC and Taco Bell combinations with Long John Silver and A&W drive 20-30% sales increases and at least 30% increases in unit cash flow.

Our market planning process tells us we have 13,000 long-term potential opportunities in the U.S.

alone including conversions in new units.

The acquisition is going very well.

We retained to the CEO Chis Elpstein, and have a cultural mix.

We have already restructured to capture organizational and synergies as we go into next year.

Overall year to date we opened up almost 100 multi-brand restaurants and we are on track to open at least 325 for the year, as promised.

Interestingly, the 13,000 potential multi-brand unit opportunities I just talked about do not include any Pizza Huts.

We are now developing opportunities to bring multi-branding sales and profit growth to the over 4,000 unit Pizza Hut dine-in asset base, by testing pasta and burgers.

We recently signed a license agreement with Pasta Bravo, a fast casual chain on the West Coast. We will also be testing Pizza Hut-A&W burgers which we think is our very best pizza and burger combination, because of the all American heritage of both brands.

We are also testing Taco Bell and A&W.

Owning a burger chain with a great brand recognition in the Midwest, which happens to be Pizza Hut's heritage and has a great recognition in the west gives us a significant opportunity going forward.

We want to be the best in the world at multi-branding great individual brands, and that's exactly what we have.

Taco Bell is the dominant Mexican USR chain and I'm pleased to report the brand is strong.

We have tremendous sales momentum and expect a solid third and fourth quarter.

If you haven't tried them already, have you've got to try our new Border Bowls.

They are a big hit and obviously driving incremental sales and traffic.

KFC is the dominant fried chicken chain and is basically on track for a 3% same store sales increase for the year.

This will make KFC positive for the past eight out of the last nine years.

You'll see plated meals go national in the fourth quarter, which will reinforce our [INAUDIBLE] positioning and differentiate our value.

Pizza Hut is the leading pizza chain and has challenges at the moment.

While system-wide same store sales are up 4% year to date and by system-wide I mean franchise and company sales combined, we are up 4% year to date and 1% in the second quarter, our company same store sales were down 3% in second quarter and are flat year to date and that's obviously not where we want them to be.

We attribute the second quarter softness to a tough overlap of last year's successful twisted crust combined with the fact that we frankly did a poor job of marketing the re-introduction of the Insider pizzas.

However, we have more product news in the back half planned and are improving our advertising and will see more of a delivery focus in company marketing.

The company asset base, as well you may know,is primarily delivery-carry-out units where the franchises operate primarily dine-in restaurants.

The companies delivering carry-out units are in more competitive metro markets.

You should know that we are really making terrific progress at driving improved delivery service times at Pizza Hut.

We expect a good fourth quarter Pizza Hut in momentum taking us into 2003.

Importantly at each of our companies around the world, we are executing our customer mania initiatives and global operating platform.

Since last quarter our customer mania training is in full swing and we are making progress in the key operating measures of each of our brands.

We have much to do but deeply believe we will continue to get better and better and better in driving a trusted customer experience through improved operations.

Alwin Lewis, our Chief Operating Officer is on the call and will give you a mid-year update after Dave Deno gives you the numbers.

For those who attended the analyst conference last year, we laid out the specific measures that we are going to hold ourselves accountable to from an operating standpoint, and Alwin will take you through the progress that we are making on those measures.

Stepping back, regardless of the uncertain environment that we face today, we are certain that we are in an absolutely great business with a great business opportunity.

One thing is for certain, people always have and always will need need to eat conveniently and eat at a great value.

We offer this benefit globally with category-leading brands and our multi-branding formats represent the most excitement USR customers have seen since the introduction of the drive-thru window.

If you recall, consumers preferred multi-brands, two brands versus one-brand restaurants 6:1.

That's a powerful advantage going forward.

With that let me turn it over to Dave Deno, our Chief Financial Officer.

Thank you, David.

Looking at the second quarter, we were very pleased with second quarter performance.

It was another great quarter by any measure.

The 24% growth in ongoing operate earnings per share was a result of solid performance in the U.S. and exceptionally strong performance by our international business, which is our largest and fastest growing division.

We expected ongoing EPS in the second quarter to be in the range of 42-44 cents last time we spoke.

International is expected to be our key growth vehicle with ongoing operating profit growth of 30-35%.

Our international team exceeded this with 47% growth and as a result, we came in with a 45 cent per share for the quarter better than even the top end of the range.

Let me stress again as I have in the past, the importance of international, our largest and fastest growing division.

Now we'll take a detailed look at second quarter results.

First I'll walk down the P&L and give you a sense of how results compared to our forecast in the last press release.

International revenues grew at a record rate of 18%., versus our mid-teen guidance.

Revenue growth was strong in a number of key markets including China, Mexico, Taiwan, Korea, and the UK.

International market increased 3.9 percentage points to 16% which was much better than we anticipated in a new quarterly high for the international team.

Continued progress and productivity in same-store sales growth enabled this strong performance.

Just as a reminder, this in the same quarter last year when we incurred transition costs related primarily to our acquisition of the KFC franchise restaurants in Taiwan.

As we anticipated then and commented at that time, these costs would subside over time and the market performance would improve.

They have.

The second quarter results were also aided by the shift in timing of the Chinese New Year from Q1 typically to Q2 this year.

U.S. top line results with a high end of the forecast range both for same-store sales and revenue growth.

U.S. ongoing operating profit increased 16% and that was about 5 points better than we had anticipated.

Solid revenue growth and better than expected restaurant margins up 17% were factors in the favorable U.S. profit performance.

G&A expenses, including franchise license expenses other income, increased 6% which was slightly more than we anticipated or about $5 million above the prior forecast.

We continued to invest and spend G&A when appropriate, behind our growth initiative.

International expansion in our start-up markets and multi-branding expansion, which consisted of operating execution in our multi-brand testing as well as to support the focused effort behind improving restaurant operations and customer mania.

We will continue to invest behind these initiate balances of the year.

Interest expense was favorable with lower debts than expected.

We completed our bank and credit facility refinancing.

I'll talk more about that later.

We were very pleased with both the bank and credit facility refinancing as well as a ten-year bond issue.

In short, it was a very big success.

Our ongoing operating tox rate of 31.8% was slightly above the high end of the range we anticipated.

No issue here, just some timing on tax planning initiates.

Our full year forecast for the tax rate remains unchanged at about 32% for ongoing operating earnings.

As I said earlier, Q2 was a great quarter by any measure.

Given the broad-based strength in our global portfolio, we have given a forecast for the third quarter which is higher than most of you expected and increased our full year forecasts as well.

Turning to the third quarter, as stated in our earnings release yesterday, we expect ongoing operating EPS at 45-47 cents or 10-15% growth in the third quarter.

We expect solid performance globally.

Revenues will increase again.

As I mentioned previously, we are now growing revenues with our refranchising essentially completed.

Our expectations have not changed.

We continue to expect 6-7% growth in revenues prior to revenue growth from our Long John Silver-A&W acquisition.

Including the acquisitions of these restaurant brands, revenues will increase at 14-15%.

Overall, we expect good growth in U.S. ongoing operating profits and above target growth for international business at plus 20% ongoing operating profit growth in Q3.

Restaurant margins should expand by at least one full percentage point world wide versus last year.

G&A costs will be higher than last year, growing at about 15%.

This is a result of the Long John Silver and A&W acquisition first and foremost.

Excluding the new brand, we expect the G&A increase to be 5%.

Spending and investing in our growth initiatives continues.

In our actual expansion, multi-branding as well as operations initiatives to improve customer experiences.

Finally, interest expense will be upwards of last year a dollar term with the acquisition of the Long John Silver and A&W brands and ongoing operating tax rates should be in the range of 31-32%, slighty below last year's Q3 rate of 32.7.

All in all we expect a good quarter at Yum! Brands.

Turning to the full year, there is no doubt we are off to a great start in the first half and expect a good third quarter.

As a result we raised our full year forecast to at least $1.88 from the range of $1.82 to $1.85 last time.

This reflects above forecast performance in Q2 and Q3, improved foreign currency translation, about 2 cents a share on the year and a reduction in our contingency.

For more details on the full year forecast, please see the earnings release from yesterday evening.

We feel good about the year and we will keep you updated with period sales results every four weeks.

You will be able to track with us as we finish the year.

As I've already said, we will formally update the investment community with any changes to the EPS expectations as soon as we can.

Please keep in mind, though, that we still have a long ways to go.

It's only July.

Let's look forward beyond 2002 and talk about how our current performance fits our long-term earnings growth model.

As we've said previously, our earnings growth model is such that you can count on at least 10% growth in ongoing operating EPS each year from the global restaurant portfolio.

We've targeted to beat that 10% rate.

If we can, like this year, we will.

Let me explain how we come up with a target.

First the most important component of Yum! EPS growth is international restaurant expansion.

This should contribute 6-7 points in EPS growth each and every year.

To achieve this level of growth, we'll continue to expand our international restaurant base by at least 5-6% each year.

The current run rate is 6%.

We do not see any reason for that to change going into 2003.

We feel good about our international development forecast as we have the people and systems in place to make this happen.

Importantly, this growth has been and will continue to be funded internally by our international businesses' cash flow from operations.

[INAUDIBLE] Overall company growth is on target as is growth from our franchise partners.

International development is the key driver to Yum! Brand EPS growth for years ahead.

It is the first and important measure when monitoring Yum!

As an investor in answering the question, is Yum! performing on target to drive EPS growth.

The second most important factor to our earnings growth model is multi-branding expansions through the conversions of the KFC, Taco Bell, Long John Silver and eventually Pizza Hut restaurants in the building of new multi-brand restaurants in the United States.

This contributes 4-5 points of EPS growth each year.

The key metri here is how many multi-brand restaurants are we adding?

The important question is are we building toward our long-term goal of 13,000 multi-brand restaurants in the U.S.?

We are currently at about 1600 in the U.S.

We told you coming into the year to expect 325 additional multi-brand restaurants to be created in the U.S., equally split between conversions of existing restaurants and new units.

We added 89 multi-brand restaurants for Q2 and have just reviewed the pipeline for the balance of 2002 and I'll tell you we are very confident of adding 325 multi-brand restaurants this year.

As an investor, you should expect to see that number ramp up by 100-150 restaurants each of the next five years.

With the acquisition of Long John Silver and A&W brand, we are confident of meeting this higher objective for 2003 and beyond.

The returns are there and the resources are in place to make it happen.

Importantly we can properly pace and sequence this multi-brand development.

We do not have to rush or hurry to meet our targets.

As with international expansion, our multi-branding expansion will clearly be funded by U.S. cash flow from operations.

These are the major two growth drivers to the Yum! model.

The third leg to the Yum! earnings growth model is our base business world wide.

The key here is to produce consistent 2-3% growth and same-store sales, modest improvement in restaurant margins and G&A productivity enabling revenues to grow faster than G&A.

This should result in about three points of GPS growth each year.

On the international side, we just completed our 16th straight quarter of system same-store sales growth.

I would say that's consistency.

We are striving for this type of consistency in our U.S.

business.

We are very focused on improving our restaurant operations and Alwin Lewis will update you on our progress in a minute.

The good news is the [INAUDIBLE] of our moving in the right direction.

Operating improvements along with the excellent work we are doing in marketing and brand differentiation under the leadership of our concept president, will help drive consistency and sales growth.

Including 2002, U.S.

same-store sales growth has averaged about 2% in spinoffs and has a positive four of the last five years and we expect to achieve at least 2% in the future each year.

Restaurant expansion has been fairly consistent over five years and we're well beyond the target this year in a low inflation year.

Our margins are approaching 16% and to the historians out there, you'll recall that our margins spin off at around 11%.

Our margins are 16% fully absorbed.

Nothing is excluded from that number, like depreciation, for example.

At that level I would compare our restaurant margins to anyone in the QSR category [INAUDIBLE] to their average unit falling levels.

G&A expense, after declining each of the last five years, will increase modestly this year, primarily from the Long John Silver and A&W acquisition and investments in key growth initiatives that I mentioned earlier.

Overall, in each of our businesses, we have very good experienced teams in place to continue to make it happen and drive the kind of growth we are targeting.

Looking at external factors for the next year, right now cost inflation and major commodities looks like will remain modest as much as anyone can predict, and we expect industry unit growth will continue to remain very modest into next year, so the outlook for base business continues to be sound.

Both three drivers of our earnings growth model, international development, U.S. develop through multi-branding and base business growth, add up to 15 points in earnings growth capability each and every year.

We target with range to be able to ensure and say to you that you can count on at least 10% EPS growth every year.

The contingency we keep, up to 5% in growth, is to provide for the unknown such as competitive forces, inflation spikes, foreign currency weaknesses, et cetera.

That gives you a longer term view on what to expect to continue from Yum! in 2003 and the years ahead.

One last thing on earnings growth models, I talked earlier about our international businesses' excellent performance this year.

I will leave you with one final thought on our international business: You all know how much I appreciate our international business and the growth it provides.

What is interesting is how excited people seem to get over the opportunities to successfully build 1,000-unit chains in the competitive U.S. market.

Interestingly our international business fills 1,000 new unit restaurant chains every year for about $225 million in capital with the help of our growth partner, our franchises with very good returns, no delusions, driving our largest division to grow at least 15% per year.

No one else in the category is growing like this internationally and no one else has the capacity to continue to grow at this rate into the future.

Now let me briefly update you on integration of Long John Silver and A&W which has gone very well.

We expected cost savings of $12 million and looks like we will easily else exceed that target and even allow for some reinvestment back into the business for quality improvements.

We'll have more specifics later this year, but certainly the expected acquisition will be added to our results in 2003.

As David said earlier in the release, multi-branding of these two brands continues to go well with plans to ramp up multi-branding for 2003 being put in place.

That said, we are on track to clearly meet what we expected from this acquisition and confident of exceeding expectations as we learn more about the potential of the brands we acquire.

I mentioned earlier, we were able to complete our bank credit facility refinancing in a very satisfactory manner.

[INAUDIBLE] We are very happy with the rates.

The bank lines extend through 2005.

In addition, we issued $400 million in ten-year bonds.

This, also, was oversubscribed.

We were really excited to get this level of debt turned to ten years.

Our balance sheet is stronger than ever and our liquidity is better than ever.

Thanks to our treasury team for a great job by strengthening our balance sheet and liquidity.

Finally, there's been a lot of discussion in the investment communities about corporate government issues.

Of most immediate focus was new FCC regulations, David Novak and I will be personally certifying our financial statements.

We have no problems with this.

We have always viewed our financial processes, financial discipline, and financial statements to be first rate.

There has also been a lot of talk on accounting for stock options.

Our plan is to wait for the governing body to give us firm standards so we can be on an apples to apples comparison to the rest of the industry.

In the meantime, we will be happy to continue to disclose the impact of the corporate stock options.

[INAUDIBLE] The EPS impact is 3 cents a share the year we decide to dispense options.

That will grow 3 cents a year until the fourth year, where it will top out at 12.

We will fold the expenses of stock options into our earnings growth model at at least 10% growth each year.

As we do with everything else, we will continue to keep our investors informed on this topic.

Many of you had the opportunity last December to come to our investment conference in New York.

One of the young leaders you saw was Alwin Louis, our COO, who details all the processes to improve restaurant operations. With that, I'll turn it over to Alwin for all the details.

Thanks, Dave.

Since I spoke with you last December, we've made solid progress against building key operational metrics and have launched several important initiatives.

First, I'd like to review our progress against the our Chef's Mystery Shop program.

This program measures our ability to execute the critical customer attributes of cleanliness, hospitality, order accuracy, maintenance of our restaurants, product quality and service.

Last year we averaged 89% on that tool, which was a two-point improvement over the prior year of 2000.

We promised a target of 91% for 2002.

I'm happy to report we are currently achieving 91%.

We are right on target for our two-point increase for 2002.

All of our businesses are showing progress but I want to particularly highlight our Taco Bell team which made the most significant progress on this tool this year.

[INAUDIBLE] We said we are going to launch three key operational initiatives and let me start by going through each one of these.

Our balance score card, [INAUDIBLE] and customer mania training are the three [INAUDIBLE].

Our balance score card is our foundational tool.

This measures overall performance with each and every restaurant general manager and all our field operational leaders, including one from myself.

It measures people, sales, profits and customers.

The balance score card is in place around Yum! and it's the first full year we've had it completely around Yum!.

We identified in December a target of 3.0 as our grade-point average and thus far in 2002, we are running slightly ahead of our target at 3.15.

This is on a scale of 5.

I've already reviewed our customer measures of the balance score card.

Let me give you details about some of our key people measures.

Key member turnovers are what we really are most interested in.

This measures the stability of the environments in our restaurant.

We are making significant progress in reducing this key measure.

On average our team member turnover has improved almost 20%, from 150% at the end of 2001, currently we are around 130%.

This is ahead of our target of 140%.

The second major operational initiative launched this year is our Champ Excellence review, we call it CR. This is a full-blown audit--front door, back door--over three hours.

It measures all the processes and procedures in every restaurant at least twice a year.

We are launching this process this year at KFC and Pizza Hut and Taco Bell; therefore, the audits are unannounced because we are using it as a coaching and training tool -- announced.

I'm sorry, they are announced this year.

In 2003, the audits will be completely unannounced.

We targeted an average 80% for our first year and thus far we're slightly ahead of that target.

That's not where we want to be in the long run, but it's a good start and an indication we are moving our operations in the right direction.

Finally let me update you on the progress toward Champs mania trend.

David earlier mentioned where we are, we launched a training in the first quarter.

We now have two rounds of training behind us around the globe.

Our total goal was to train our 725,000 team members on this new trend.

We are not entirely system wide yet but continue to gain converts every day.

Operators who have launched the [INAUDIBLE] training see it as a clear win, providing additional training [INAUDIBLE] employees.

It allows them to engage employs in our business, teach them our objectives and challenges, and empowers them with the ability to solve customer complaints on the spot.

[INAUDIBLE] of 100 complaints which are in each of our three domestic companies have declined anywhere from 15-30% and we're just getting started.

The key with this major training effort is to do it each quarter and we are committed to do that from here on out.

So to summerize, we have continued to make progress this year operationally.

Targets that we communicated to you in December are right on course to meet or exceed each one of those.

I am confident that we will make the right adjustments. I expect in the next two to three years we'll be moving towards the goal to being top operator in each one of our companies.

With that I'll turn it back over to Dave.

Thanks, Alwin. [INAUDIBLE] Owen and I routinely meet with our [INAUDIBLE] operators.

Last night we had a session with 20 of them, we had dinner and talked about customer mania and the training that's going on, and the excitement we have in our organization-- it promises to be an operation that's really starting to pay off for us.

It's a journey, we are making steady progress but we ultimately expect our operations to be so good that they broaden sales.

What we'd like to do is take any questions that you have, for Alwin, myself, or Dave and fire away.

Okay, Charlene.

Open up the questions.

At this time, I would like to remind everyone if you would like to ask a question, press star then the number one on the telephone key pad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from Michael Sheric.

Thanks and good morning.

A couple of questions.

First for Dave Deno, with regard to restaurant margin, can you just talk a little bit, labor was lower than I would have thought, can you comment on that and is Champs is having an impact on labor costs and also just help us with regard to food costs, how much of that was fueled by lower cheese prices.

Sure.

On the labor piece, first of all, the wage rate situation is pretty good.

We've experienced relatively modest increases in wage rate.

But obviously we got sales leverage in labor costs with higher sales, our people put out more product and we got leverage there.

Let me really highlight the most important thing that's happened and we talked about that.

And that is turnover in our restaurants is coming down a lot, especially at Taco Bell.

And when you have lower turnover, you've got lower training costs, better efficiency and the like, and so our labor margins are enjoying that so we've got a favorable macro economic environment from labor costs.

We've got sales leverage, but most importantly our turnover has come down which helps on the cost side.

On food costs, we have experienced favorable commodity costs.

Cheese is good, especially right now, Michael.

It wasn't -- it's been getting better and for the second quarter it helps Yum!.

Although you'll see some or most of the benefit is in the third quarter especially.

Second was somewhat favorable.

But also we are getting in our sales growth, we are getting growth in transactions but also guest check as we introduce--some of the new products that we're introducing--so that is helping somewhat with our food costs, also.

So favorable commodities and good marketing and guest check management has helped us out with food cost drive.

Just one last one, can you just comment on--you talked about the incremental impact of the Border Bowls, what have you seen in terms of the Border Bowls from a mixed perspective, and then lastly just a quick comment on the popcorn chicken giveaway, what have you seen in terms of customer retention on that? Thanks.

We don't routinely disclose mixed information on our products for comparative reasons.

But we've been--we've met our expectations and exceeded our expectations on Border Bowls.

We are very happy with the product.

And popcorn chicken, the mix has met our expectations.

The free giveaway was fine and the mix and incremental sales have gone up.

Popcorn chicken has primarily met our expectations so far.

The franchises would like to do the promotion again.

That's always a good sign.

Next question, Charlene?

The next question comes from.

Howard Denny.

Thanks very much.

Relative to your guidance of 42-44 cents for the second quarter, you cited, I think, 5 points better performance than you expected out of the U.S. operating profit growth, lower interest expense than what you expected and in the international business, it was also better.

So why didn't you beat the number--why didn't you beat it by a penny or more?

Sure, I'll be happy to talk about that.

First of all as you saw in our release, Howard, the tax rate was a little bit higher than we expected.

The shares, the number of shares, was higher because at that time our share price was higher and I talked about the cause, the fact that we reinvested some of our TG&A initiatives in the quarter, being multi-branding and international performance.

Those are the three things, Howard, that impacted our overall earnings.

[INAUDIBLE] So it wasn't the spending in the 42-44 cents--?

No, I mentioned in my comments -- no, we spent higher than we expected in the quarter to the tune of about a penny a share, each unit.

Thanks, very much.

Your welcome, Howard. Charlene, next question?

Your next question comes from

John Glass..

Thanks and good morning, too, please.

First on the results of the multi-branding in the Long John Silvers that you opened up with KFCs or Taco Bells in the quarter, you talked about

20-30% sales pickup, so as you get a bigger base, have you been meeting the earlier expectations.

My understanding was earlier you had sort-of very explosive sales growth in the multi-branding in Long John Silver, if that continues, any further color on that.

Second question, on the international guidance for the third quarter, 20% operating profit growth guidance versus 47 for this quarter, your sales are going to be slightly lower in terms of growth but is there anything else going on in the international margins we ought to be aware of in the third quarter, that would be different other than sort-of sales average?

No,on the international side, want to remind everybody that last year Q2 was our weakest quarter internationally especially on the margin side and we worked hard the balance of last year to improve our margins.

We don't foresee anything this year on the margin side to impact that.

We expect a good margin going forward in our international business.

The [INAUDIBLE] will get tougher and also last year, this is significant in our business, Chinese Near Year was in Q1 last year and it was in Q2 this year and that helped us get some sales growth that you won't see from a calender basis standpoint in Q3.

At least 20% earnings growth in international by any stretch of the imagination is terrific performance.

On the Long John Silver multi-branding with KFC and Taco Bell, results continue to be very good.

It's early in the process.

But things we have seen lately continue to meet our expectations and exceed our expectations.

I want to stress again, we only have a handful of these.

We have the pipelines in place and making progress and results are good.

Thanks, John.

Next question.

Your next question comes from.

Joe Buckley.

Good morning, hi, couple of questions.

On the comments on the full year ongoing operating income growth, if I'm doing the math right, seem to imply that the international second half will grow at about 15% or at least 15%, I guess, and the U.S. very modestly, am I looking at this the right way and remind us, you know, some of the variances that is came into play in the third and fourth quarters in terms of those comparisons?

Yeah, sure. I think

International will continue to grow at this point strongly and we talked about the amount for the year and the U.S. growth does drop off some the balance of the year.

Joe, let me remind you that our fourth quarter last year was by far the strongest quarter and I just think that our earnings guidance takes that into effect.

We feel good about our trends and what we are doing in the business.

But I think you look at last year, our fourth quarter was really terrific and we are focused as an organization to [INAUDIBLE] and go off with that performance.

So our earnings growth--very strong the first half of the year--we continue to feel good about the trends but the comparisons get tougher as the year moves along.

Okay, and lastly, could you comment on sort-of the base business that Long John Silver and A&W, just what kind of trends they're seeing in [INAUDIBLE] and how they're performing separate from the multi-branding, which I realize is the driver of the acquisition.

Sure.

And what we have seen our base business is is they are meeting expectations.

Sales are okay to pretty good.

The comps are positive.

But let me remind you, Joe, that the most important reason we got this acquisition is the multi-branding expansion and what we see there.

We're not taking our eye off the base business by any stretch of the imagination and we've got plans in place to grow the base business, but the multi-branding piece is the most important reason. [INAUDIBLE]

I understand, thank you.

Thanks, Joe.

Your next question comes from Peter Oaks.

Hi, good morning.

I wanted to talk specifically if we could about Pizza Hut, it's struggled for the last couple of years.

You did mention some of the differences that you are seeing in the trends between the company base and the franchise.

Does that actually mirror exactly for Delco versus Red Roof? If we could start there.

Yeah, for the most part, we've seen trends in both sides of the business.

Our franchise Delco operations have a lower sales volume and I think some of our franchises are jumping on some of the programs that we've done in the U.S. over the years, so, yeah, you could start there.

David, I think I had mentioned that the Delco base was a company faced--facing a little more competition.

Do you see that base as it's currently structured at a competitive disadvantage that's contributing to that underperformance?

[INAUDIBLE]the last average unit volumes in the category, Peter.

We do know that we are in a competitive metro business.

Dominoes has picked up a lot of momentum in the last year.

You know, we think winning the delivery business is sort of the defining battle in the category, certainly for the company restaurants and we're all over it.

We've got the seven commandments for delivery service.

We are testing service initiatives that we are are actually considering advertising and we've got volume promotions that we'll be moving towards to take on Dominoes more on a direct basis particularly in the company markets.

So I think as we look at the second half of the year, we'll have a stronger delivery focus in the marketing and we had a product that we think will work on both sides of the equation that we will be introducing in the balance of the year.

A new product.

Okay.

I'd be kind-of curious if Alwin would kind-of share his input, is there anything from a champs perspective that's contributing to that delay?

No, actually Pizza Hut is having the highest Champs attainment that we ever have had.

We don't do mystery shoppers, we do direct customer feedback and get up to about 28 of those a period.

Those have moved significant this year.

So the speed of service is at an all-time high, champs at an all-time high, and CER scores, been in it longer but their CR scores also leading the company.

So we feel good about the operational progress.

I think the important thing is when you look at the total system, it's 80% of our franchise, stores and franchises [INAUDIBLE] this year, you know, we are up on a system-wide same-store sales basis 4% year to date.

So the business obviously can do better and we're clearly focused on making that happen.

But I wouldn't describe the situation as malaise.

You know, I would say that one thing we do have an extreme focus on is winning every quarter and driving same-store sales every quarter.

We didn't do it in Pizza Hut in the second quarter, so we're definitely not happy about that but I can assure you the team feels plenty of pressure to get it moving in the right direction.

David, while we're on the topic of kind-of the despairity of counts between companies and franchises, is there anything noticeably different between the company and franchise basis of the other two brands?

Taco Bell is basically a mirror image of each other, and KFC franchises are doing slightly better than the company.

Okay, thanks a lot, guys.

Peter, we want to add we appreciate your upgrade yesterday in our company.

Okay, gentleman.

Thank you.

Thanks.

Your next question comes from Cora Lee Whitter.

I've got two questions, actually.

The first is on the operational improvements.

Looking through your hand out from your analyst update in December you provided a very interesting distribution of champ scores and wondering how that distribution has changed.

How many have moved on, you know, "d" up to "c', and the "c" up to "b" and if there's a pretty clear correlation between improved results as to "a" scores; and then the second question is on international.

If you could flush out a little bit more how your core market strategy is really driving the leverage there and more specifically if you can talk about performance in your four key markets, China, Mexico, Korea and UK.

Okay, I'll take the international piece and I'll turn it over to Alwin on the upside.

On international, I think speaking for the whole company, I think the single biggest reason we are seeing the kind of growth we are seeing is the core market strategy in our international business where we have really honed our investments in on key equity markets and also grown with our franchises overseas.

But if you look at that, markets like China, the market in the UK, Mexico, both places are really, really growing rapidly.

And what happens there is, we have seasoned management teams, the brands are becoming more and more well known every day, we've processes in place, so all that comes together to provide really [INAUDIBLE] growth in those markets.

So we've got the benefit of same-store sales growth plus rapid development plus experienced management teams and processes all coming together to really grow the business very rapidly.

And then in other markets, we've got large franchise partners that are growing the business, opening up restaurants and continuing to our profit growth.

So that combination is a very profitable combination for our company. Now I'll turn to Alwin on the upside.

Big key to us achieving our 2-point champs improvement that we promised is just eliminating the "d"s and "f"s. We're right on target with [INAUDIBLE], we're right on target with our quarterly targets with eliminating 'd's and 'f''s

We've [INAUDIBLE] the organizations to eliminate 'd's and 'f's by tracking each quarter and each of the companies are right on target with the elimination.

And you know, continue to put a ton of positive pressure on getting those out of the system is key to us in our target balance of the year.

So we're right on track.

Just a follow-up on the "d"s and "f"s. Last December you had 22% of your stores in that category, how many of those have been moved into "c" versus how many have been closed. And can you just talk about where you are,

What% is in that category still today?

I don't want to give specifics on that, but like I said, we--I think our target was to get into the mid-teens on the "d" and "f" elimination.

We are right on track to do that.

and we would not be hitting our 91% if we had not made plans, which is 'd's and 'f's elimination.

Okay, great, thank you.

Thanks, Cora Lee. Next question, please?

Your next question comes from

John Ivanko.

Hi, thanks. Could you discuss the integration of the Yorkshire franchises, which is a tri-con system, and anything that you may he be doing there to kind-of help them get up to operational standards and set for the overall Yum! system and is it also possible to give a perception of the Champs scores that currently exist in those two brands?

Thanks.

We've had a very successful integration and feel really great about how everything is working out with Long John Silver.

One of the things we've done is is we really tried to get the organization absorbed into our culture and get a real clear understanding of what we are trying to do from a culture standpoint, operating standpoint.

One of the ways I do that is I teach a leadership program called "taking people with you." How to get results faster by bringing people along which is basically what our business is about because you've got to have people capability.

So I brought in the leaders of the Long John Silver franchise organization and leaders of the A&W franchise organization along with the entire management team and senior leaders of Long John Silver and A&W and we went through that program in three days.

And they are extremely excited about, you know, the growth that we are going to be able to achieve together and I think everything is moving along ahead of what we imagine.

I think part of that is we have [INAUDIBLE] our CEO, he's done a terrific job of bringing the team together and making the moves it takes for us to make the integration successful.

We've already restructured to some extent, put a new CFO into the company, and a new Chief People Officer, who really understands all of our operationg processes strong, [INAUDIBLE] champs and customer mania and they'll be rolling out, you know, our key operating processes over the next 18 months.

What we are trying to do is pace and sequence it so we just don't hit everybody with every program we have overnight,but we plan on doing that in a very, you know, focused way.

One way to think about this is we just bought this company for multi-branding and whatever G&A they are spending [INAUDIBLE] is a resource that we can spend toward executing multi-branding as we go forward.

We are really going to use that vehicle, that company as a means to really build our multi-branding resource capability as we go forward.

Execution is the real challenge that we have and that's, I think we just have more resource to get that done with the organization and franchises than we had before.

You know, so we'll also be putting Long John Silver and A&W and working toward including them in the purchasing co-op.

You know, we are buying media together, you know, and Long John Silver, which has a media budget, taking advantage of the efficiencies that we can do there, and just a hot of things are happening and feel very, very good about it.

You should know the only thing that happened that we didn't expect was that Kevin Armstrong, the President of Long John Silver, he resigned, and the reason why he resigned was totally for personal reasons.

He wanted to go back to Wisconsin with his family and he also had a [INAUDIBLE] with his faith and personal desires.

Those are the things we can't deal with, okay.

But other than that everybody is in place and we're moving forward.

Operationally we think, based on the customer measures we've seen, we think their turnover scores are much, much--as you know--[INAUDIBLE] much higher than ours, they are anxious to get into our people problem -- people programs and, you know, we know based on external data that customer measures are in the bottom to middle tiers, so you know, nothing special.

So we're going to want to take them along with us as we climb up the ladder on operational improvement.

Do you have anything to add on that Alwin, or--?

No.

Thanks, John.

Next question, please.

Your next question comes from Janice Meyer.

Hi, thanks, good morning.

A couple of questions.

Just as a follow-up again on the margins.

Third quarter margin for half the expansion that you saw in the second quarter, can you talk a little about maybe what cost trends worry you or you know what's not continuing from the second quarter.

And then from Alwin, Alwin, how do you judge whether the decline in turnover is because of your program or because we just have an easier, you know, market out there from a, you know, a labor standpoint, not as easy to get competing jobs and in your goal to become a top tier operator, how do you plan on measuring yourself against your competition?

Okay, Janice.

Dave, I'll take the first question, then I'll turn it over to Alwin.

On the margin side, we don't really see any change in our existing trends in 2002.

The market trends we see from a cost standpoint, sales leverage, productivity, et cetera, continues to be favorable.

Again Q2 last year was our weakest margin performance.

And as you look at growth year on year in margins, the last becomes more difficult because as we grow on top of that, we spend a lot of time improving margins last year [INAUDIBLE] and talked about this conference call last year at this time.

The base trends we see exist, we feel good about the trends and we tried to forecast that accordingly.

It's the year on year growth as we improved last year, that's the primary reason for that.

Now I'll turn it to Alwin..

We are proud of the turnover numbers and no doubt the macros have improved from employment standpoint.

We have not seen that radical improvement from the segment we hire from in the cities that we do business in personally, they are still very tough.

Turnover in Minneapolis goes from, you know, .5-1.5 to 2%.

That's still a tough hiring market.

We are confident with the tools we are using and the pressure we put on our operators to drive retention, that's the primary driver and we're constantly watching it.

We spend one day a period where we talk about people in every restaurant in our region, I think the sign that our people processes are important is that our franchises [INAUDIBLE] and our ultimate goal, we're not pleased with you know, where we are today, our ultimate goal is to get to 100 and we believe the tools we have today will get us there over time.

Our best restaurants and our best countries, 50% is where we want to go and that's our long-term target there. [INAUDIBLE]

So I still think it's more of us doing hard work versus the macros.

Versus the competition, internal measures got to keep going and putting a ton of pressure on that.

We think our internal pressures line up with what we will see eventually externally.

But the University of Michigan studies for customer service that gets published the fourth quarter, we want to make improvement there.

Restaurants and institutes, [INAUDIBLE], all those things ultimately we want to move from the bottom to top tier.

Our goal is to be top tier.

You can't be top tier until external measures say you're top tier.

We want our five companies duke'n it out to be one or two in every major management.

And so while we are pleased with the improvement inside, we are not satisfied until external measures show that.

And we think those ought to start moving, you know, next year, year and a half, because there's a lag effect. [INAUDIBLE]

The published reports is what gives us validation that we're top tier.

Thanks, very much.

We have a customer experience monitor, too, which compares our customer perceptions on cleanliness, hospitality, accuracy, product quality, speed.

We compare ourselves to all the best competitors in the direct competition.

We have a sense of where we stand.

Thank you.

Next question, please.

The next question comes from Andy Barrish.

Can you quantify the Yorkshire impact in the second quarter and the second half, just refresh our memory.

And a clarification on your statements, Dave, on the multi-branding.

I think you said it could have a 4-5 percentage point impact on earnings per share.

I was just wondering, is that from an incremental comp point or how you kind-of got to those numbers?

Okay, sure.

And to the second question first.

That's a combination of incremental comps along with [INAUDIBLE] development.

A combination of those two things together gives us the growth that we need and Tim and Scott will be happy to flush out more details for you, Andy, if you have further questions.

But that's how we look at it.

The Long John Silver impact, we only had it for four weeks in Q2.

So the impact was negligible.

We expect the earnings impact to continue to be slightly diluted this year just like we laid out in the road show and then we think next year we initially thought it would be flat but we think now it could be slightly increative going into next year.

But clearly had a tiny, tiny impact on Q2 and Q3 and Q4 slightly diluted.

Thanks.

Your next question comes from Mitch Fizer.

Can you discuss what impact, if any, positive currency will have on international operating margins and I have a second question.

Sure. On international operating margins,

I mentioned in my discussion earlier foreign currency in a sense has slipped by about $10 million [INAUDIBLE] and we've incorporated that. in our forecast and everything else.

But so that was the first part that we saw.

Very small negligible impact on our margins.

And as a result, you don't really don't see too much in our operating statistics.

Maybe some in our overhead and things but really it's a very, very small part of the business.

Could you remind me again, I'm sorry, the first question you asked?

I asked the first one first, and now the second one.

At Pizza Hut, the 10.99 price point seems to be more and more difficult to deliver on.

Just looking down the road, do you think that 10.99 price point is vulnerable for even your evaluated pizzas and do you see the industry moving more toward 8.99 and 9.99 price points?

Thanks.

We think we command a premium price in product that is unique and special in the marketplace especially when we introduce a brand new product.

You know, we think what we did with the Insider at a time when everybody was selling three pizzas for $15, [INAUDIBLE] we don't think we were price competitive there during that period and one of the reasons we had some softness.

The other thing that made the Insider weaker in the second was that we were bringing it back.

It wasn't brand new.

That was the third time we had that product in the marketplace.

So we come in with a brand new product that's never been introduced before, we can come in at a higher price point as long as the product is special enough to command that.

But in the delivery business, that is primarily a traditional pizza business.

Products like the Big New Yorker where we offer a good every day value on is really where the battleground is played.

Big New Yorker or hand-tossed pizza and even stuffed crust, versus three products that allow us to compete in that traditional pizza segment.

Thanks you.

Thanks.

Next question, please?

Your final question comes from Paul Westra.

Just a follow-up on your margin reference on new products.

The Border Bowl and KFC, are those equal or higher margin products as well as higher penny profit and is that the strategy that your --

The same arena with higher penny profits.

And that's your go-forward strategy and apply that to any value-based delivery pizza product in the second half as well?

You know,I don't think that's the ongoing strategy.

We will not -- that's not the singular strategy. Product introductions are just the peak of the overall, you know, market place strategies.

I think one of the things we really believe in, [INAUDIBLE] you've got your every day products, you've got to drive the menu to bring a lot of excitement with a second tier in the specialty arena where we leverage innovations where nobody else has in the category.

We try to mix things up at Pizza Hut, we have specialty pizzas and also have our big New Yorker and every day price fighting kinds of activities which we've mixed, that's what we would describe as two tier.

At Taco Bell, we've the best value on the industry in an every day basis and we're now advertising products like the Border Bowl which goes for $2.99 and brings in an incremental lighter user base.

We found we got more power frankly when we introduced the Grilled Stuffed Burrito and advertised for 1.99 because it actually enhanced the value perception, bacause you get resales on that, so

Every product is different, we try to push the levers in the right way to really excite the customer, and at KFC, we are selling our portable products like popcorn chicken and we're doing two tier and now more advertising on our chicken on the bone so we support both of them on marketing on an ongoing basis.

We try to treat each brand a little bit differently understanding what the customer dynamics are and evaluate our value strategy ongoingly, not only on what our customers are telling us but what the competition is doing.

Great.

Lastly, can you give us an update on 02 and 03?

800, roughly -- sorry, $800 million.

Great.

I want to thank everybody for the questions and being on the call.

Let me wrap it up by just saying we are really executing three very unique opportunities in our industry.

One is the international growth that we have which I think is becoming more and more obvious to everybody.

Two, is the multi-branding strategy which really is transformational in the industry and something we are leading the way on.

And, three, what we are doing from a customer mania standpoint in training team members every quarter and really getting them more focused on the customer as well as everybody else that supports our team members more focused on the customer, we think is going to really lay the bedrock for improved operations as we go forward which is imperative in our business.

And finally, you know I think we don't have to invent any new strategies.

In this company, we've got the strategies.

Our challenge is to execute, execute, execute and that's what we are doing and we'll report to you our progress each and every quarter.

Thanks again and we appreciate it.

Thank you for participating in today's Yum!

Brands 2002 second quarter earnings release conference call.

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