百勝餐飲集團 (YUM) 2004 Q1 法說會逐字稿

Good morning.

My name is Brian, and I will be your conference facilitator today.

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

Brands first quarter 2004 earnings conference call.

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

After the speakers' remarks there will be a question-and-answer period. [Caller Instructions] I will now turn the conference over to Mr. Tim Jerzyk, Vice President of Investor Relations.

Mr. Jerzyk, please go ahead, sir.

Thanks, Brian, and good morning everyone.

Thanks for joining us on the call.

Before we begin I'd like to go through a few necessary things.

This call is being recorded and will be available for playback.

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

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

I would also like to advise that this conference call will 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 safe harbor statement included in our earnings release of last night and may continue to be used while this call remains in the active portion of the company's website which will be until midnight May 7th, 2004.

On our call today, David Novak, Chairman and CEO; and Dave Deno, our CFO.

Both will follow with remarks and we'll then take your questions.

Now I'll turn it over to David Novak.

Thank you, Tim and good morning everybody.

As you probably saw from our release we had an even stronger than expected first quarter; 47 cents per share and 21% growth.

This was clearly led by a continued strong performance from our international business, as well as very good results from Taco Bell and Pizza Hut in the United States.

KFC U.S. performance lagged, as anticipated, but we continue to expect KFC to be up 1 to 2% in same store sales the second half of the year.

Based on the really good Q1 results and the momentum in our key businesses, we are raising our commitment for 2004.

We are increasing our estimate by another three cents to at least $2.30, or 12% growth.

This is up 7 cents from our original estimate, of at least $2.23, which we provided to investors in our New York conference this past December.

This estimate takes into account the adverse short-term impact from the avian flu in Asia, affecting second quarter, and higher than expected commodity inflation during the year, particularly cheese costs.

We are confident because we have solid plans for the balance of 2004 in place for all of our businesses.

Our ongoing goal is to increase EPS at least 10% each year and this year you can expect at least 12% earnings per share growth based on what we see today.

Before Dave Deno, our CFO, takes you through the details of our results and expectations, let me provide some highlights of our first quarter and some perspective on the remainder of the year.

First let me talk about our largest division.

Our high-growth international business.

A business that makes YUM! totally unique in the restaurant category.

For the first quarter YUM!

Restaurants International achieved record revenues of $673 million and profits of $130 million, which increased 28% versus last year prior to foreign currency benefit.

In U.S. dollars the increase was 36%.

China and the U.K. markets continue to be key drivers.

KFC is the leading restaurant brand in China, and we are widening the gap versus our nearest competitor every day.

Pizza Hut also now has 130 stores in China and is the casual dining leader.

We fully expect to open 300 new restaurants in China this year and grow same-store sales.

Our strategy is to dominate every significant food service category in China.

In the United Kingdom we also continue to grow units and same store sales at both Pizza Hut and KFC.

Generally around the world our business is strong, including our very significant franchise-only markets like Asia, the Middle East, South Africa, and Latin America.

In fact, our international franchisees opened more than 70% of the new restaurants for the system in the first quarter, displaying solid confidence in the continued expansion of KFC and Pizza Hut brands around the world.

However, Mexico, an important market with great potential where we already have 500 units, continues to underperform.

We're earning about $10 million this year in Mexico.

Clearly we have longer term upside in this country and we're working hard to turn this business around.

We just launched an everyday value program that looks promising, and I'll post you on our progress as we go through the year.

Importantly, for the fourth straight year we again expect to open over 1,000 system restaurants outside the United States.

The revenues from these new units, combined with the generally strong performance we are seeing around the world, along with the improving global economy, gives us confidence we will grow our international profits at least 15% this year.

Once again, I want to emphasize, this includes the short-term impact from the avian flu in Asia and is already included in our second quarter estimates.

In the United States we also have good momentum in new programs backing us up.

First some perspective on Taco Bell, our largest U.S. business.

Taco Bell continues to lead the way for the U.S. business and the category.

Based on internal estimates, Taco Bell is now the second most profitable QSR brand in the United States and, as you know, just celebrated hitting the 1million mark for average system unit volumes.

Franchise profitability and optimism is good and improving every month with the strong sales we are generating in the cash flow of the business.

We are especially pleased Taco Bell grew its first quarter same store sales 6%.

You can see from last night's release the solid performance carried into period four, the first period of the second quarter.

This result is coming from steadily improving operations and excellent marketing with relevant product news.

Taco Bell's "Think outside the bun" advertising campaign and strong product pipeline also continue to drive consistent same store sales growth.

For instance, we are driving the business with the new improved fiesta taco salad.

The taco salad has been on our menu since 1984 and the team upgraded the packaging and ingredient quality.

This was well received by consumers and there's more excitement like this coming for Taco Bell the balance of the year.

For example, in about four weeks Taco Bell will be upgrading the quality of our chicken soft taco, a regular menu item.

We will launch a new and improved version with better quality, and an even higher price called the ranchero chicken soft taco.

Consumer testing tells us that consumers significantly prefer this new soft taco.

It will be coming to your Taco Bell in about four weeks.

So you can see Taco Bell is raising quality through new products like quesadillas, border bowls, and grilled stuft burritos; as well as through quality upgrades of tried and true core menu items like our taco salad and soft chicken taco.

Importantly, Taco Bell's operations performance continues to steadily improve, with the focus on exceptional execution of the basics which was the theme of their 2004 operations boot camp that they just held in January.

We are off to a solid start this year, have a strong beat year ago marketing calendar and expect to stay on track at Taco Bell.

Now on to Pizza Hut.

Q1 was a very good quarter at Pizza Hut.

In fact, Pizza Hut has now shown positive same store sales growth in 11 of the last 12 periods.

We are steadily improving the consistency of our same store sales performance.

The brand is being successfully repositioned to target the heart of the pizza category, the family and the primary decision maker, mom.

In 2003, the new product pipeline was rebuilt with a record number of product and concept tests.

We kicked off this year with one of those products, the new 4forAll pizza which gives the family four pizza choices in one pizza.

Everyone in the family gets to pick the topping for their very own individual pizza.

Market research clearly shows us the consumer loves the variety and individuality of the 4forAll.

Consumer acceptance has been very positive and all indications are that this is the most significant pizza category innovation since we launched stuffed crust pizza.

We currently are looking at 4forAll as a permanent addition to the Pizza Hut menu.

Based on everything we know about the original test markets, how they're currently performing, and the consumer feedback we're receiving we are thinking that 4forAll has a reasonable chance of becoming a permanent menu addition.

No one else in the category has it, we're seeing new customers at Pizza Hut post the launch, and mix continues to be strong.

But it's early and we can't get ahead of ourselves.

We are cautiously optimistic.

Pizza Hut is also steadily improving its operations and is the first one of our brands to achieve team member turnover of less than 100% for the full year in 2003.

All in all, we expect a much improved year for Pizza Hut because of the heavy lifting we did last year and the news we have in the pipeline, and that's new in addition to the base we have already established with the 4forAll.

KFC U.S. is clearly our biggest challenge, but we remain confident our new management team is taking the right actions to turn the brand around.

The key is, is there's been a major ops focus on improving the basics prior to the brand relaunch.

Key actions thus far have included the implementation of a one-system op structure.

This aligns field management on both company and franchise restaurants around the operational basics.

This is the same approach we took at Taco Bell three years ago.

KFC's operations plan for 2004 is being implemented in three phases.

Phase I has been a massive clean across KFC campaign leading to the implementation of cleaning captains at every restaurant as we prepare for our new products ahead.

Phase II will be a real drive towards speed and the speed incentives inside our restaurants and with our restaurant teams, in conjunction with a special promotion we have with Dale Earnhardt featuring our chicken on the bone product and the Kentucky Fried Chicken famous bucket.

Phase III will be moving towards customer appreciation day on October 7th, which is YUM!'s founders day, where we'll really be driving hospitality and making sure that our customers feel the difference and energy that we're driving in our operations.

We view ops to be the foundation of our turn around at KFC just like it has been at Taco Bell and Pizza Hut.

On the marketing front we continue to emphasize the fact that our chicken on the bone is brought to our restaurants fresh, not frozen, every day, with the message of kitchen fresh chicken.

Most significantly, we have a major relaunch of the KFC brand beginning in May.

This will include the launch of a new advertising campaign, a new menu board and the launch of relevant new products over the next several months.

Over the next year you will see the KFC focus will not only be on bringing new non-fried products to our menu, like oven roasted strips but also offering more excitement to the core fried chicken customer.

The second quarter, the quarter we're in right now, will be tough for KFC as we lap boneless wings last year in periods four and five; but we expect to see same store sales turn positive the second half of the year.

I'm confident we are working on the right things at KFC and it will pay off.

In total, when you look at our entire U.S. portfolio, we expect blended same store sales to be up about 2% for the second quarter and 2% for the full year; given the improvement we are making in operations and what we believe are better positioned brands with significantly stronger marketing programs.

We also continue to make progress multi-branding our great brands in the United States.

In the first quarter we passed the 2,200 store mark in number of U.S. multi-branding units.

This year we expect to add at least 500 U.S. multi-brand units, 600 next year, and another 700 in 2006.

Long John Silver's is exceeding expectations and is our best multi-brand partner brand.

We are focusing on executing a fish-first expansion strategy to make LJS a national brand.

A key factor is we are transforming LJS into a fish and shrimp seafood restaurant and improving the product quality.

In fact, we just launched a delicious giant shrimp.

Consumer reaction has been very positive.

Long John Silver's broke many daily and weekly sales records the past two months.

The brand is doing well.

At Pizza Hut, we are continuing to test Pasta Bravo with our franchisees as a way to remodel and revitalize our dine-in business.

Several franchisees will open more Pizza Hut/Pasta Bravo combinations this year.

In 2003, we created WingStreet which we are testing as a partner brand with Pizza Hut delivery this is a line of tasty bone-in and boneless flavored chicken wings.

WingStreet's initial results are promising enough to allow us to expand testing.

We have expanded this test to additional markets and will watch the results.

We are in the very early stages of multi-brand development at Pizza Hut U.S., but are bullish on the opportunity just like we are at Taco Bell and KFC.

Overall we have a full-time dedicated operations team working on the systems that will help us expand our multi-branding business even more successfully in the future.

Significant progress is being made at improving service systems, investment costs, and margins.

We are more confident than ever on the prospects of multi-branding opening up new unit growth in the United States given the success we are seeing with Long John Silvers and the obvious opportunity to make it a national brand.

Customers clearly love multi-branding and our franchisees are opening up half of our units, which is indicative of the power of the unit economics of a well-run store.

Last, but not least, the YUM! balance sheet is now an outstanding shape.

We have essentially eliminated all of our bank debt.

During the first few months of this year, each of the rating agencies acknowledged our progress, and I'm happy to report YUM! is now rated investment grade on all of its debt by every rating agency.

As a result, we are now in a great position to strongly consider a dividend in addition to buying back stock and further reducing our debt.

With that as a preamble, let me turn it over to Dave Deno to take you through details of the numbers.

Well, thank you, David, and good morning everybody.

This morning I'm going to cover the following items: The important trends in our YUM! performance, a brief overview of the first quarter, the outlook for the second quarter and full year, a review of current trends in each of our businesses; and, of course, I'll review the cash flow and, as David mentioned, the ever strengthening balance sheet.

As we stated in the earnings release from last night, we continue to feel very good about our business outlook and trends in 2004.

First quarter was a terrific quarter.

Our biggest businesses, international and Taco Bell, ended the first quarter with strong sales results.

Our next biggest business, Pizza Hut U.S., finished the quarter with continued positive same store sales growth.

Pizza Hut has generated positive same store sales growth 11 of the last 12 periods.

Overall for YUM!, it's enabled us to exceed the 43 cents we had expected to deliver in EPS for the first quarter.

We are pleased to get off to such a good start in 2004, and we expect 2004 to be a terrific year.

Looking ahead we do have some near-term challenges we've talked about previously in the second quarter and we have them covered.

The financial impact of the avian flu in our Asian business and a tough sales lap at KFC in periods four and five will impact the second quarter.

Both of these have been previously communicated and there is no news here.

The good news is that the negative impact from the avian flu is behind us and trends are now back to where they were prior to the flu outbreak.

As a reminder, our international results are reported on a one-period lag, so in quarter two we expect the short-term effect of the avian flu to impact our earnings by about two cents which was included in our estimate for Q2 and consistent with prior estimates provided.

We remain confident of second-half improvement in KFC performance considering the plans we have in place, as David mentioned, and the very easy same-store sales lap in the U.S. throughout the second half.

Finally we expect high cheese costs to impact U.S. restaurant margins by 1.4 percentage points, but we are not sitting on our hands.

We are taking an aggressive and comprehensive set of actions to offset this increased cost.

Our forecast assumptions, relative to the movement of cheese prices the balance of this year, do not include an immediate and significant drop in cheese prices.

I want to emphasize, however, that given the strength of our -- of most of our businesses: international, Taco Bell, and Pizza Hut; we remain confident about the second quarter and the full year.

In fact, we raised our full-year EPS forecast again and are now 7 cents higher than our original forecast provided at our December investor conference.

Before I review first quarter results, let me briefly review some key trends in our global business which we think are important for you to consider.

First, the international business, our largest and fastest growing division, is as strong as ever.

This is a unique advantage for YUM!.

For the first quarter, system sales growth of 8% in local currency, exceeded the low end of our ongoing target range.

This is continuing strong performance after an extremely good fourth quarter of 2003 with results up 10%.

Once we clear period five results with the last vestiges of avian flu impact, we expect sales performance to return to these levels.

International profit, excluding the benefit of foreign currency, increased 28% in the first quarter.

After conversion to U.S. dollars, profit was up 36%.

Importantly, we continue to steadily expand our restaurant base at a 5% rate; and have done so consistently the last 15 quarters.

This should give you a clear sense we continue to profitably grow this big business.

Second, our largest U.S. businesses, Taco Bell and Pizza Hut, have solid sales momentum and very good plans for the balance of 2004.

Importantly our growth in these two brands is balanced, coming from both traffic growth and guest check increases.

Both Taco Bell and Pizza Hut have, what we think, are solid plans for the balance of the year and should produce continued good sales results even with tougher laps.

As a reminder these two brands produce over 75% of our U.S. profit.

Third and, as David mentioned, our strong cash flow performance and our balance sheet continues to strengthen.

We repurchased $216 million of our stock in the first quarter at an excellent value as noted in our earnings release last night.

We have virtually no debt that comes due during 2004.

The earliest tranche of our bond debt comes due in May 2005 and it's only $350 million and, if we choose to do so, we can repay some or all out of cash flow.

In addition, our key financial ratios continue to get better and better.

As David mentioned, early this year, all three rating agencies raised YUM! to an investment-grade rating.

As we laid out for you this past December in New York, we expect an ever increasing flow of cash available to shareholders for the foreseeable future.

This year we expect $680 million, and over the next several years we see that number increasing to over $800 million.

To sum it up we have confidence in our largest three businesses in terms of momentum and quality of the plans they have to execute, and YUM!'s overall financial strength is as good as ever.

Now let's talk about the first quarter.

We came in at 47 cents for the quarter, 4 cents better than what we thought back in February.

International and U.S. sales growth were clearly better than we expected, as was worldwide restaurant margins.

These were the main factors as to why we beat our Q1 expectations.

Additionally, foreign exchange was slightly favorable.

Partially offsetting these upsides were higher spending in G&A, as we continue to spend against our priorities such as international growth, new systems; and during the quarter we incurred about $7 million in one-time G&A expenses detailed in the release last night.

We also incurred some minimal one-time expenses related to the dissolution of the Yan Can joint venture.

Finally our income was up, which is primarily our -- our other income is up, which is primarily joint venture income in key growth markets such as China and the U.K..

All in all, Q1 was an outstanding quarter, a great start to 2004, and EPS growth was 21%.

The one headwind we faced in the first quarter was higher costs for cheese and beef, this was six-tenths of a percentage point negative to U.S. restaurant margin in the quarter.

Having said that margins remain favorable in the U.S. during the first quarter.

We expect continued unfavorable commodity expense in 2004, primarily cheese, but we've factored it into our forecast.

In Q1, despite this headwind from U.S. commodities and higher G&A expenses, we were able to exceed our expectation for the quarter and drive 21% growth in EPS.

This should give you a sense of our earnings power of this global company its diversified portfolio of businesses, including a very healthy international business; which, again, we expect will drive at least 60% of our earnings growth in the quarters and years ahead.

For the second quarter, we are comfortable with the consensus estimate of 52 cents per share, prior to special items.

We expect our international business will continue to lead the way in profit growth driven by new restaurant expansion with the added benefit of several million dollars from foreign currency conversion.

Additionally we expect a solid quarter in same-store sales growth from both Taco Bell and Pizza Hut as well as continued expansion of multi-branding in the U.S.

You will note that in the release last night the quarter got off to a very good start with solid period 4 sales results continuing at Taco Bell-up 6% and Pizza Hut-up 3%.

As I said earlier, avian flu, higher cheese costs and negative sales trends at KFC have all been factored into our Q2 forecast.

Simply put, our strong international business, continues favorable sales trends at Pizza Hut and Taco Bell, and continued execution of our financial strategies more than offset these negative impacts.

We are a large diversified global company with plenty of opportunities and are definitely not an ordinary restaurant company.

One example that I can highlight in the first quarter results for China, which we noted in the release last night, our business there had a huge first quarter and they're on track after a brief avian flu interruption.

As always you can track our progress during the quarter as we provide you with both international and U.S. sales updates at every four-week period.

If our expectations change you will hear from us as you have in the past.

Now let's quickly look at each of our businesses.

First international and some of its key markets.

As I said, in China, we had a very strong first quarter.

The team there launched a new roasted chicken platform late last year which has performed very well.

Anytime you can drive 25% growth in units and very solid same-store sales growth, it's a powerful impact on profit growth.

Most importantly in China, as David said, we expect to open 300 new restaurants this year, most of which will be KFC's, and we'll be continuing our Pizza Hut casual dining expansion.

This is a major rapid growth market for YUM!.

Most of this business is company-owned.

There are a few joint ventures with just over 30% of the restaurants and a small amount of franchise restaurants.

In the U.K., another larger international business, both Pizza Hut and KFC continue to show growth in system sales.

This market generated, in total, 8% new restaurant growth and positive same store sales.

As a result strong profitable expansion in this large international market continues.

As a reminder, in the U.K. our KFC business is a mix of franchise and Company ownership; while the Pizza Hut business is a joint venture with Whitbread, a large U.K. company.

Generally, our important markets have shown a continuation of positive trends from last year's Q4.

Mexico, Canada, and Japan remain the markets that are providing some challenges.

Wrapping up international in 2004, it is very important for our international business to continue to profitably expand with new KFC and Pizza Hut restaurants.

I reiterate that we expect to open, again, more than 1,000 new international restaurants; as well as benefit from the first full year of operations from last year's record number of new unit openings.

This is the most significant driver of YUM!'s annual EPS growth and sets us apart from other restaurant companies.

Now let's talk about the U.S. business.

In the U.S. business we expect Taco Bell to lead the way in sales performance for Q2.

In fact, we expect Taco Bell and Pizza Hut to have good sales growth in the second quarter.

Taco Bell will likely exceed our target of at least 1 to 2% same-store sales growth, while Pizza Hut should meet the high end of that target.

KFC will likely be negative with it's toughest lap of the year.

Overall the U.S. should easily meet the target of at least 1 to 2% blended same-store sales growth in the quarter.

Our largest U.S. business, Taco Bell, continues on path for another very good year, with steady same-store sales growth; and we expect that to be at least 2% for the year.

We are in our third year of growth post the turnaround, which began Q4, 2001.

As we have said in prior communications, and David Novak talked earlier, Taco Bell has a strong pipeline of news for 2004.

We are well aware that the sales laps are a notch tougher the balance of the year, but we are confident because of the strong two year growth rate and we continue to steadily improve operations; which we back by a strong pipeline of product news.

On to Pizza Hut.

Pizza Hut just completed the launch of the 4forAll pizza which was the first pizza innovation of the year and continues to perform well; well into the launch and into the local option window.

They will continue to focus on the 4forAll, as well as bring more relevant product news ahead to America's families for the all pizza eating occasions.

We remain confident Pizza Hut will continue to drive at least 1 to 2% same-store sales growth for the balance of the year.

At KFC, the message I would like to emphasize is clearly a first-half/second-half story.

First half will have challenges including some tough laps in period four and five, and the second half will be improved; including all the actions David just outlined for you and some relatively easy laps in comps in the second half.

As we have said in the past, we do not expect changes to KFC's U.S. same-store sales trends until summer, when we expect they'll begin to turn positive and lay the foundation for the turnaround.

We expect 1 to 2% same-store sales growth at KFC during the second half of 2004.

On to Long John Silver's and A&W.

These brands continue to perform very well.

The role these two brands is clearly to be our primary multi-brand enablers in the United States; and Long John Silver's will be the lead.

David told you about the strong sales results at Long John Silver's, and we're optimistic about the opportunity to expand through multi-brand new unit growth.

Our key multi-brand focus includes combining Long John Silver's with KFC, Taco Bell and A&W.

I'm happy to report that the early results are encouraging, including the pairing of Long John Silver's with A&W.

Since the acquisition we have added 33 Long John Silver's/ A&W restaurants to our system.

New stores are trending above target, generating annualized sales in excess of $1.3 million on average.

Replacement stores have been above target, adding annualized incremental sales on average in excess of $450,000.

Finally conversions are right on target adding averaging annualized incremental sales of $250,000.

Now turning to the full year.

Overall given our terrific first quarter, strong trends and the plans we have for 2004, we are raising our full year estimate again from at least $2.27 to at least $2.30 for the year.

Before I wrap up, let me briefly review our ever improving balance sheet and continued strong cash flow.

We expect about $1.2 billion in net cash provided by operating activities, with about $770 million in capital spending.

So free cash flow will be substantial again this year, over $400 million.

In addition, as you can expect from us, we'll generate an additional $100 million from refranchising at least $130 million in employee stock option proceeds, and about $50 million from the sales of surplus property and equipment.

That's another $280 million of cash that we will have available for about $680 million.

We expect 2004 will be another year the YUM! balance sheet continues to strengthen and financial ratios will continue to move in a favorable direction.

For 2004 you should expect to see us make solid progress with our share repurchase authorization, consider a dividend, and look for additional opportunities to reduce debt as necessary.

Just to wrap up, we beat our earnings expectations for Q1 with 21% growth and we expect continued growth in Q2.

We're committed to at least 12% growth before special items this year, ahead of our 10% target and believe we have plans in place in all of our businesses to have an absolutely terrific year.

With that I'll turn it back to you, David.

Thanks, Dave.

So you can expect this year to be another very good year for YUM!.

We'll achieve at least 12% earnings per share growth before any special items, generate well over a billion dollars in cash flow from operating activities with increasing free cash flow.

Our balance sheet will get stronger and stronger, and now that we have reached our goal of investment grade, the possibility of a dividend is strongly now under consideration.

We are focused on executing our three key strategies.

International is continuing to expand profitably, we are making steady progress operating our restaurants with a more trusted customer experience, and multi-branding is continuing to expand with the focus on Long John Silver's.

Now we'll be happy to answer any questions that you have.

Thank you, sir. [Caller Instructions] We'll pause for just a moment to compile the Q & A roster.

Your first question comes from the line of Coralie Witter with Goldman Sachs & Company.

Good morning.

I have two questions, actually.

The first is directed at David Novak and Aylwin.

The question has to do with operations improvements.

This is something you've been talking about for the last three years.

You started on a lot of these processes at Taco Bell, which was the first to consistently improve.

You're doing some of that now at KFC.

Can you just walk us through the time line of when you started seeing certain operational improvements across the three brands and how correlated that is with same-store sales improvement so that we can understand how sustainable consistently positive trends are across these three brands?

I think it's very hard to isolate like when it all happens, but I think, you know, whenever any of our businesses have been in a situation where we needed to turn the sales around; it's usually when we realize, just like most companies, when you're really not focusing on the core basics.

At Taco Bell, I'd say, you know, we really started implementing back to basics operations, you know, three years ago; and by the time we got into year two we started to begin to see progress.

This was also done in conjunction with, you know, a significantly better understanding of where we needed to take the brand from a marketing and consumer standpoint.

So we really think it's a one-two punch that has to come into play at each one of our brands.

Same with, you know, if you recall, you look at Taco Bell, we really focused on speed, really cleaning up our restaurants, and then we repositioned the brand against sandwiches and hamburgers with the "Think outside the bun" campaign; and we had a steady stream of relevant product news to really make that come to life.

At Pizza Hut, you know, we really -- we did basically the same thing.

You know, we focused operationally on speed of service, our phone service, and, you know, simultaneously we worked on improving our consumer proposition by targeting up against moms, the primary decision maker of the family, which is the driver of the occasion, new advertising campaign, "Gather around the good stuff," then a complete line of new products that really began to bring meaningful, relevant product news to equation.

At KFC we're basically proceeding along this same line.

We've really focused very much on cleanliness and driving speed of service, and we are beginning to see very good progress on the ops front, but we've got a long ways to go.

Now, we're also in the midst of rethinking our whole marketing equation, how we're positioning the brand, and you'll see a new advertising campaign, which I don't really want to go into detail on today, that will help us launch -- relaunch the brand and will help us, we think, better communicate in a more relevant fashion the news of new products like tender roast strips, salads coming down the line, and fried news that we'll have; along with the new menu board that we have.

When you look at our progress, at Taco Bell, for example, this year we have 56% of our shops are 100% champs.

That's where you deliver the operational basics of cleanliness, hospitality, accuracy, maintenance, product quality and speed.

Last year that number was 43%.

So we're making some pretty significant progress at Taco Bell and we think that, to go along with the speed of service improvements, and their late-night program, is a big driver of the success we're seeing at Taco Bell.

At Pizza Hut we've gone from 42%,100% champs last year, to 50% this year.

So again we're having a significant uptick in terms of our improvement.

The bottom line, though, in both these situations you still have 40 to 50% of your shops where we're not meeting the basic expectations of the customer every time, so there's tremendous opportunity there.

Now, when you look at KFC, here's where we think we have the most opportunity to improve operationally.

Last year at this time we had about 39% of our champ scores were 100%, this year we have about 42%.

So we're only -- we're up three points and we've got a long ways to go.

So I think next year you'll see, you know, we're hoping to see an eight to ten-point improvement there, and as we get that improvement we think we'll get more consistency.

We believe without a doubt what we are doing on the operational front to improve core operations, making that our number one strategy, is the single biggest thing we can do to drive consistency in our business performance over the long-term.

The bad news is that right now with our customers, only, you know, 45 to 60% of the shops that we have are what we want our customers to get.

The good news is that's tremendous upside for us as we go into the future, and that's what we're focused on.

Alright, thanks.

The second question is for David Deno.

On capital allocation, you highlighted the tremendous free cash flow, $680 million.

You highlighted the debt upgrades by the credit rating agencies.

How should we think about allocating that cash across a potential dividend, share buybacks; could you walk us through how you're thinking about it?

Well, Coralie, even though you directed the question to me I'll ask David to answer that.

First of all, I think that as you look at our business and the health of our business, we're really in a sweet spot because of the success we've had the past six years, and the billion dollar plus annual cash flow that we generate.

So the first recognition, strategically, that we emphasize to our board, and as we look at our business; is that we are a core growth company, and we have tremendous upside to grow this business.

So, this year we're spending $770 million on capital in terms of new units and upgrades and maintenance, and we're really focusing that capital up against the big growth drivers that make us unique in the industry.

With the YUM!

Restaurants International and all the rapid expansion internationally and multi-branding.

So first and foremost, you know, the cash that we generate, you know, is going to go up against growing this business; and the good news for us is we have plenty of growth upside in our core business which we're very excited about.

We're obviously now very pleased our debt is well structured and is now low.

As you know, Coralie, and everybody else that's followed our company, from the minute we were spun off we made it priority to become investment grade; and that is now an achievement that we have realized and we're excited about that reality.

We're also excited about the fact that we can give back to shareholders, and we're doing that in two ways.

Number one, we're going to buy back stock.

Especially when it's a great value like it is today.

And number two, we're going to pay a dividend, or consider paying a dividend; and when we do, and provided the board approves a dividend, we expect that dividend to be meaningful to our shareholders.

So, you know, right now, we're in the midst of evaluating these opportunities, looking at the balance, obviously we have to get board approval on anything that we would decide.

As you know, in the first quarter, we bought back a significant number of shares.

We view our stock to be a very good value, and we continue to expect to buy stock, and the one thing I will tell you is we don't want to get -- we do not want to pay a dividend that isn't meaningful.

We want it to be meaningful to our shareholders, and if we do decide to do a dividend and the board approves it, it will be meaningful.

Great, thank you.

Thanks Coralie.

Brian, next question.

Yes, sir.

Your next question comes from Mark Kalinowski with Smith Barney.

Just wanted to ask a couple of items off of the rising gasoline prices that we're seeing.

First, it doesn't seem like we're seeing gasoline prices scare consumers out of restaurants, quick service sector trends in general remain quite strong, and just wanted your take on why, perhaps, gasoline prices aren't scaring consumers a little bit more than it appears to be.

And second, just wanted you to go over how gasoline prices affect delivery at Pizza Hut in terms of how drivers are compensated and any related issues.

Thanks.

Yeah, couple things, Mark.

It's Dave.

We have not seen a change in our sales trends with the rise in the gasoline prices.

I think that consumers have, with the growth in the economy and everything else, consumers have enough disposable income to spend money up against our restaurants.

And, of course, Mark, as you know, almost 40% of our businesses is overseas and we don't have that particular issue overseas.

Now, I think the second thing on how we compensate drivers, we look at that, we look at that in pay packages and how we compensate drivers on a delivery service; and so we take a look at that and we adjust as necessary, if we think that's necessary, we took it up a little bit here lately but again that's in our forecast, so we try and stay on top of that.

I think the other thing that I would add is that, make no mistake about it, we would much rather operate in an environment where you have a great economy, okay, lower gas prices, all those things that make it easier for the consumer to buy.

Nevertheless, you know, when these kind of things hit the marketplace, the economy goes softer, you know, the gas prices go up, we have an everyday value in our category that's very much appreciated by our customers and makes us more resilient than other categories and I think that exists.

Having said all that give me a great economy, give me gas back at a buck, and I think we'd all be a lot happier.

Yeah, me too.

Thanks, Mark.

Brian, next question.

Yes, sir.

Your next question comes from the line of Peter Oakes with Piper Jaffray.

Hi guys.

I actually have a couple.

I was hoping to focus on U.S. company margins.

Specifically, the food and paper element.

As you mentioned, commodities hurt you for 60 base points in the quarter yet that line item was down ten basis points and if we compare it to whether it be fourth quarter last year or all of '03, where you didn't face nearly that kind of commodity pressure, the line item was up like 50 to 60 basis points, so was that a mix shift or are we seeing a little more pricing that's factoring in?

Peter, as you remember last year we did a lot of dumb discounting at Pizza Hut and KFC.

And we didn't do that this year.

We haven't done it this year.

We've been much smarter with our offerings, and as a result we've enjoyed the benefit and candidly better sales by not doing stuff like that.

Okay.

Secondly, I guess on the Pizza Hut brand, can you give us a sense of the 4forAll what kind of mix you're seeing at this stage of its role versus what you saw at stuffed crust at a similar stage?

Yes.

We don't like to necessarily get into significant mix detail, Peter, but it has been an exceptionally successful product for us.

The mixes were very strong.

We believe it's a long-term product for us, as David mentioned, and the mixes are hanging in there quite nicely, so it is among our most successful product launches we've ever had and the mix is hanging in there.

Okay.

And maybe just lastly, I think David had mentioned that you're still sticking to your 2% comp assumption domestically on a blend basis for the full year.

I just want to make sure that we're not supposed to be interpreting a different message from your perspective.

If you did a 4 in the first, and you're pretty confident about a 2 in the second that would imply only a 1 in the second half, or thereabouts.

So I just want to make sure that that's the message, the way the math works out.

Yeah, for the year, we initially talked about 1 to 2, we've raised that to at least 2.

We feel that 1 to 2 the balance of the year, Peter is fine, and, again, it's the first quarter and we've just got to keep rolling here, and we can't get ahead of ourselves; but we like the position that we're in.

Thanks a lot.

Thanks, Peter.

Brian, next question.

Yes, sir.

Your next question comes from Mitch Speiser with Lehman Brothers.

Thanks very much.

A few questions.

First, you didn't mention chicken costs as a pressure in the first quarter or going forward.

Just wondering if you can let us now how you're handling the chicken cost front which is supposed up pretty sharply year-over-year?

Yeah, Mitch, if I can just step back for a minute, we have a very large purchasing cooperative at YUM!, and the chicken market is a little more robust, shall we say, than the cheese market; and we can do some pretty smart buying and hedging and things and I think we've done a very good job of that.

For example, in one of our companies, because of the purchasing cooperative and the power of that cooperative, we're going to actually experience deflation in chicken costs year-on-year, and we're experiencing -- which is much better than the rest is marketplace.

So that's the first thing.

I think we've been taking advantage of the robust marketplace in the chicken category.

Thanks.

And you mention that you dissolved your relationship with Yan Can.

That supposedly is a pretty hot category.

Just wondering what happened there.

It sounds like you changed your mind on perhaps the potential of that category.

I think what happened was, if you recall we did a joint venture and that joint venture was with one of our great franchise partners, Arthur Ho.

And Arthur unexpectedly and sadly passed away about a month ago.

And, you know, when we looked at this, we went into a joint venture with Arthur knowing that he would lead it, had the passion to drive it, it was going to be managed off-line and wouldn't really require a lot of YUM! attention.

With his passing we believe that that business would require more of our attention than we should focus it on.

And the bottom line is that we're a huge scale business.

And for us to work on things we've got to have -- work on things that are big enough and large enough that will impact EPS and, you know, if not my lifetime, but the next regime's lifetime or the next 25 years.

It'd take aus long time, okay, to really build a big business with Yan Can.

One of our strategies is to focus on our core business and avoid getting hung up in some hobbies that might take our eye off the ball.

With Arthur's passing we looked at this and said since we don't have him to run the business off-line like we originally decided, we're better off getting out of the business.

I think the category is a good category.

There was a lot of excitement about entering that with Arthur.

We just don't have the desire to go on without him as our partner.

Understood.

And moving along, your U.K. business seems very strong.

Give us some perspective, McDonald's seems to be struggling in the U.K.

Just trying to get a sense of why KFC is so strong given, you know, a lot of stiff competition and one of your main competitors actually struggling somewhat.

Well, I think, you know, first of all, we have, you know, two brands there.

That are basically half the size of McDonald's.

So we have tremendous upside in terms of growth, in terms of new unit opportunities.

Now, when you look at the core business, I think that, you know, both teams have done a very good job of focusing on the core operations using the programs that we've established in terms of our global operating platform.

And they've -- and KFC, in particular, has been much more innovative in the U.K. than we have been in the United States on the product front.

They have a very strong sandwich business there, they've already introduced salads, and they've just, I think, been much more -- they've been able to move their franchise system much fast than we've been able to move our franchise system in the U.S., and, you know, that's one of the big challenges we have.

I think we haven't led in the U.S. like we should have led and we take accountability for that, but we have a franchise system that is steeped in the past and is much more bureaucratic than it should be and we're working very aggressively with them to get a much higher sense of urgency as we go forward.

So that's why I think you're seeing very good performance in the U.K., and if you look at KFC outside the United States, that's pretty much the case everywhere.

The brand has been more contemporized, they've been more responsive to addressing consumer issues, and there's a real success to go along with that.

Pizza Hut in the U.K. also gives us, we have a one-two punch there.

We're the leader in casual dining and we really own that family dining occasion, and one of the things that happened in the U.K. that we didn't do well until United States over the years is we've upgraded our asset base, we've got a more appealing dine-in experience because of it; and Pizza Hut, as a result has a very strong dine-in business, and they've learned that as you go into the delivery business you support that dine-in business as a separate occasion and you grow the -- your delivery business through a separate focus.

And that seems to be paying off really well, and that's really what our strategy is internationally, is to--with Pizza Hut is to do dine-in the way it needs to be done and get into the delivery business with separate focus.

So we're very excited about the U.K. business and both of our brands around the world.

Can you give us a sense of how your salad business is doing in terms of, perhaps, mix and what you think might happen with McDonald's now entering the salad business more on a premium scale in the U.K.?

I think, you know, if I recall our mix was more like in the, you know, 5 to 6% range, and that was when it was advertised, but as you know, the salad works in a different way on most menus.

It's not so much that the mix is that high.

It's more of what it does, is it unlocks other users to come in, it breaks down the veto vote; so it plays a much more powerful role in the menu than what the mix really represents.

But we have an excellent salad there and we've also take--gone to school in terms of what's driving success, not only in the U.K. with the business there, but also in Australia, and we're bringing a lot of that learning here to the United States.

Thank you.

Thanks, Mitch.

Brian, next question, please.

Yes, sir, your next question comes from Andrew Barish with Banc of America Securities.

I guess I'll ask two also since that seems to be the trend.

International margins improved and you had some negative stuff in there including, I guess, a change in the Canadian joint venture.

Was that in your plan at the beginning of the year, and then kind of can you give us a little sense on international margin opportunity?

Is it still supply chain?

Secondly, on the share repurchase, which was aggressive in the first quarter, how much is left on your authorization, and are you willing to use debt to buy back stock when you kind of run through cash balances on the balance sheet?

Yeah, Andy, I'll take the second one first.

We have about $80 million left in our authorization at the end of Q1.

At this point we don't contemplate taking on debt to repurchase more shares.

David laid out for you the sweet spot that we're in with our cash flow, and we're going to be discussing that with our board and internally here and making some decisions.

So that's where we stand on that.

On international margins, in our initial plans and guidance the margins in Canada had not been contemplated.

Just to refresh everybody's memory we had joint venture there.

We converted the KFC restaurants in that joint venture to 100% franchise situation and we have the remaining Pizza Huts and Taco Bells that were in that joint venture.

The margins there are a little bit less than our overall international margins so we have to accommodate in that our earnings.

So we will offset that, Andy, and what's happening is two things: One, as markets continue to open up around the world we enjoy the supply chain benefit and we're getting very strong sales trends in our key markets around the world, and we're getting margin expansion as a result; and we are opening up new restaurants at very favorable returns with high margins.

So all three of those things are coming together leading to margin expansion in our international business.

Then just one other thing I'd like to mention is, when you think about YUM! overall, you've got to really plug in the fact that international is almost 40% of our profits.

So when you think about some of the cost pressures that we're successfully facing in the United States, we don't face it to that same extent in the international business and we've got upside because we're doing a pretty good job with the markets opening up and the supply chain getting stronger.

Thanks, Andy.

Brian, next question.

Yes, sir, your next question comes from Joe Buckley with Bear Stearns.

Thank you.

I have a couple of questions as well.

First I'd like to circle back to the cheese costs.

Dave, I think you mentioned 140 basis points of impact from cheese.

Was that a second quarter number?

Was that a full-year number?

And did I get that number right?

You got that number right, Joe, it's a second quarter number; but I want to stress, you know, myself, David, and others have been involved in the Pizza Hut business for a long time and we're not sitting on our hands and just, you know, kind of woe is me on cheese costs.

We're addressing the cost implications of our business and looking at that, outside of commodity costs; and we're looking at some guest check management mix et cetera to help offset some of that, but that's a second quarter number.

Okay.

And then I had a question-- there's more activity on the domestic front in terms of unit expansion than the absolute numbers show, and in this release you mentioned that you picked up 1% of revenue growth on kind of the portfolio mix.

Could you talk a little bit about the new units you're opening, both stand-alone and multi-branded, if there's any emphasis towards one brand or another and what kind of returns you're getting on the new units?

Sure.

We are -- with the acquisition of Long John Silver's, as David mentioned, that has given us a terrific multi-brand partner.

We have been very pleased with the combination of Long John Silver's and A&W, which I mentioned earlier in my discussion.

That has been a very promising -- it's early, but it's a very promising combination for us and will be the bulk of our -- it will be the bulk of our development going forward.

We also are very pleased with Taco Bell/Long John Silver's combinations.

Dave had also mentioned the combination of WingStreet with Pizza Hut delivery and Pasta Bravo with our Pizza Hut business.

So, Joe, those returns continue to be well above our cost of capital and we're quite pleased with how things are going and we're continuing to expand that.

Long John Silver's has been and continues to be a very pleasant surprise and we believe that can be a national brand.

On the closure side, what you're seeing is a lot of smart cleanup.

Some old A&W mall units, Pizza Hut red roof dine-in that have passed their prime; so we're closing those down and improving our business and going that route.

One other thing I'd like to mention for everybody, just as you look at our financials versus some others in the industry, we flow those closure costs through our ongoing operations.

Okay?

So when we close restaurants or when we sell restaurants, at a loss, those costs are flowed through our operations and accounted for that way.

Are you opening any single-brand new units?

Yeah, we open a few but, as David has mentioned in the past, multi-brand is our primary initiative.

Last question.

Give us a sense of check versus traffic in the first quarter same-store sales numbers by brand, please.

Sure, Joe.

On the KFC side the decline was all transactions.

Pizza Hut's growth it was half transaction, half mix.

And Taco Bell it was about 60% transaction-driven.

Thank you.

Thanks, Joe.

Brian, next question.

Yes, sir.

Your next question comes from John Ivankoe with JP Morgan.

Hi, thanks.

You talked about five international markets, major international market, and three of them were underperforming.

So if could you address what issues you're facing, Japan, Mexico, and Canada, remind us of those, as you see them today, and, I guess what a course of action plan that we could expect to make them perform more in line with a U.K. for example.

Thanks.

John, it's Dave.

David will look at that, but the one thing I want to just remind everybody is there are other major markets, be it our franchise business in Asia, be it Australia and other places.

So there are more than just those five that you highlighted in the call, so don't forget about Australia, don't forget about the franchise business in Asia and other places as we think about that.

Yeah, in fact, let me just kind of clarify what we see as major markets.

When we first started this company we had company operations in 32 countries.

All right, and what we said we were going to do is we were going to focus our operations and our company equity in some core countries.

And China is number one, which is performing extremely well, U.K. we just talked about is number two.

The third market where we're putting equity in was South Korea, okay, and that market we've completely turned around in the last six to nine months, and then the fourth market is Mexico where we're putting company equity.

We've slowed down our development in Mexico until we fix the core business.

The second set of markets are big scale markets where we're not really, you know, where we're not opening up a lot of new units and Australia is the biggest one of those.

The second would be the Canada, which is primarily franchised at this point in time, and then we have a joint venture with Mitsubishi in Japan.

We have probably spent, collectively, in the last six and a half years 15 minutes talking about Japan.

Japan has been a mediocre business for us the last ten years, we're not moving as quickly as we need to move there for lots of reasons.

Unless something dramatically changes, I think it's going to be a mediocre business for the next five years.

But it's not a significant factor in our overall performance and how we look at the business.

Outside of that, you have tremendous international businesses or franchise businesses that are growing very well.

You've got--obviously our Asian franchise business unit has had tremendous growth, new units and same-store sales growth, very strong Latin -- in Latin America with our franchise business.

So we've got really strong franchise businesses, Malaysia, Mideast, these are places where we elected not to put equity, and they're doing well.

Canada, which is a big market where we have, you know, over 1,000 restaurants, you need to know that our trends are much improved in the second quarter in Canada.

So I just think that the way you asked that question was a little bit -- it sounds like everything is -- our major markets are declining.

I don't think that's the case at all.

The only significant issue that we have that we see as a major opportunity, even though the downside is very low to us, is Mexico.

I mean, here's a country where we have 500 restaurants making $10 million and we said it should be a growth opportunity for us in terms of new units because we know that our brands are very well received there.

We want to turn that business around before we pump more, you know, capital dollars into opening up new units.

So we want to get the core established, get it back on track at KFC.

Although Pizza Hut, by the way, is doing well in Mexico.

I'm sorry if my question came across incorrectly from what I meant.

Let's just focus on those two markets that are equity markets.

In terms of Mexico what are the issues there, what can you do?

In terms of Canada I know you mentioned that second quarter trends are improving.

For the recently acquired markets that you put on the balance sheet in Canada or the brands that you've acquired in Canada, what were the issues?

Again what are you doing there to allow -- I mean, what I'm looking for, in other words, is maybe Mexico and now Canada to actually be drivers of income over time.

Yeah, first of all, John, it's Dave, the business that we picked up in Canada, KFC, the trends there are very strong.

That's all franchise now.

We have a--relatively speaking we have a very small Pizza Hut and Taco Bell business, and we will be -- our plans are is to refranchise that business and turn it into a franchise stream.

There clearly what we've got to work on, again, and it's primarily a Pizza Hut business, John.

Improving the basics of the operation, getting a much better product pipeline, and taking advantage of some of the work in the United States.

As you think about the future flows of the business it will be primarily a cash flow business that will not have a lot of earnings growth for us.

In Mexico, this is a business where we make $10 where we think we ought to be able to make at least $30 off of what we currently have.

We've got to fix the business and grow it from there.

Our strategic planning we could easily see how Mexico in the next five years if we do things right could be, you know, $30 to $50 million in terms of profit.

So, you know, what we -- again what we're doing there is focusing primarily on KFC because that's where we think we have the biggest opportunity and we're focusing on every day value there.

We've launched a new value approach with -- which is really trying to go to school on some of the other retailers there that have done really well.

Wal-Mart is doing well in Mexico, for example, and they're focused on every day value.

And we have the strongest every day value in -- already in Mexico, but we haven't really merchandised it that well.

So we're looking at how to do that, taking one of the big programs that we had in South Africa that really drove that business, and we're implementing that program in Mexico.

We're also focused just basically on turning our operations around in Mexico.

Turnover is way high, higher than anywhere else in the world.

We've got a great new operator there that we think is doing all the right stuff, but there's a lot of work to be done.

Turnover being the most significant issue that we have.

But between Mexico and Canada, I see Mexico as a much higher potential return to our -- in terms of improving our income stream to use your phrase.

Okay.

Okay?

Thanks, John.

Brian.

Thanks.

Your next question comes from the line of Janice Meyer with Credit Suisse First Boston.

My questions are on Pizza Hut.

First, on the cheese prices, I know you never fully hedged--and I know cheese prices are obviously up a lot-- but you seem to be a little more exposed here in the second quarter than normal, so could you talk a little about that maybe your hedging thoughts going forward?

Secondly, the 4forAll, what's different about that versus, for example, popcorn chicken that leads you to believe that it could be a permanent item and sustainable without constant advertising?

Thirdly, this is the last, pizza is only one piece of your business, yet most of your competitors, if not all in the U.S., it's their whole business.

Historically when cheese prices have risen, I think you've done, you know, what you said, used check management and you discount less.

Is there not an opportunity for you to actually discount more and try to take share from your competitors who clearly couldn't discount as much since it's their only business?

Sure, I'll take the last one first, Janice, and I'll take the commodity question.

Clearly I want to emphasize when we talked about the actions that we're taking it's not all revenue management.

We are working very, very hard on costs.

Second of all, to your point, when you're a company like ours that enjoys -- is in a multi-divisional situation and has such a large international business, do we have more profit coverage in some of our competitors?

Sure.

I think we've got to take a look at all those equations as we decide to make some moves going forward the balance of the year.

I don't think it would be smart to really talk through in great detail what our strategies are going to be, because we're looking through that right now.

It's a very competitive situation.

Secondly, on the commodity hedging, as I mentioned earlier, one of the things I've learned in my almost 15 years with the Pizza Hut business is the cheese market is not a robust market, and I think we have done a good job in covering our costs.

Could we have hedged a bit more in Q2?

Maybe.

But that would be, I think, a little bit of Monday morning quarterbacking on my part.

Clearly the costs have moved up faster and stronger than the marketplace imagined.

Had we not done what we did, Janice, the commodity situation would have been much worse.

So we want to just take a look at what some of our strategies are.

We do enjoy the benefit of being a multi-divisional company, and we'll incorporate that in our plans.

Okay.

You asked a question about comparing 4forAll at Pizza Hut to popcorn chicken at KFC, and what makes these two products different in terms of their role in the menu, so let me try to attack that.

First of all, I think as you know, anytime you introduce a new product, the biggest win you can have is when you provide meaningful variety to your customers.

By meaningful, that means that you're not just duplicating, you know, what you already have, you're really bringing something that brings something new to the party, something that's truly incremental, and new to the customer, so that it will sustain.

What we think we have with the 4forAll is we think we have a product that is very meaningful innovation to the category because we really are, for the first time, giving people the opportunity to order one pizza and get for their family individually sized pizzas that each person can have and enjoy.

So if you order a 4forAll, if you have two kids one can get the pepperoni, one can get the cheese, mom can get veggie lover and dad can get meat lovers.

So everybody gets their own.

We know that the family is the primary occasion in the pizza category and we know the mom likes to make the family happy.

So, what we think here is that we've got meaningful variety in our category in the Pizza Hut line because we've never been able to provide the customer this kind of offering before, and our competition doesn't either.

So what we're seeing right now is a very good mix on the product that is sustaining and we think that it will sustain because we think that the benefit is not going to go away.

We think this is really a meaningful new way to eat pizza.

Interestingly enough, popcorn chicken at KFC is--really provides meaningful variety for KFC.

In the sense that-- what one of our biggest barriers at KFC is not having products that are portable, like people have a hard time driving around eating, you know, chicken on the bone.

It's more of a stationary type of an occasion.

So when we introduced popcorn chicken we had great success because it attacked that benefit.

What we learned--what we did though, is we looked at that product more from the eyes of the operator than the customer, because the customer loves this product.

They love it because it's portable, they like the value of it, they love the taste of it.

What we did is the team elected to use it as an in and out product and frankly we don't think that was a good decision.

In company stores we are now offering popcorn chicken on -- all day, every day, you should be able to get it at KFC.

And we think that that -- the mix is good, we're working on efficiencies because we do have more waste but we think it's more important to offer the customer a product that they really love at KFC than to disappoint them or their kids when they come in to get it.

So the team has elected to put popcorn chicken on as an everyday menu item and we're encouraging our franchisees to do the same.

In fact, al lot of franchisees have done that.

But I think all of this comes back to when you introduce a new product, the big win in our category is when you provide meaningful variety, when you provide something that didn't previously exist that can't be a substitute by something else that you offer on the menu.

So frankly we think popcorn chicken is meaningful variety and it deserves to be on the menu and we're hoping that 4forAll will sustain in a manner that will tell us the same thing.

The Pizza Hut's operations platform can handle the 4forAll.

They set it up to be a permanent menu item, and, you know, we track our results, and our original test market it looks to be doing well in the original test markets as a permanent item and we'll see.

One point that you made about Pizza Hut which was the opportunity for us to discount even more than our competition, because we've got a portfolio.

I think that does exist.

The opportunity is there.

But one of the things that we strongly believe in is that we need to be competitive on value but win on innovation.

And, you know, we really believe that that's what makes us different.

People are excited by the pizzas that we offer, the innovation that we bring to the marketplace.

We've got more coming, but as we do that, we cannot lose site of the fact that people want to get a core pan pizza or a core hand-tossed pizza or a traditional-type pizza, they want to get that at a good price.

So what we do is we're offering those traditional type pizzas at a good price and we try to win on innovation.

You will see some other new products that will be coming out that allows us to do that.

But in this category at Pizza Hut you've got to have a one-two punch.

We're not seen as the low-price leader in the category.

So when we drop our pricing down significantly or we try to win by being cheaper than the next guy; we don't see as much impact as we do when we really innovate and bring forward great product news.

So we're much more in the camp of being innovative and making sure that we continually improve our operations so that we can provide the variety that we offer.

Thanks so much.

Thanks, Janice.

Brian, next question, please.

We'll go about another 10 minutes.

Yes, sir.

Your next question comes from Jonathan Waite with Key McDonald.

I'll just ask one quick question and take the rest off line.

I wanted to get a little more color on the KFC with the new menu roll out.

You said that you would be pushing it with a new ad campaign.

I wanted to have a little bit of color there.

Is that going to be drastically different from what we're seeing now?

You've got the KFC, what's cooking, is it going to carry that tag line?

As much color as you can as far as how you're going to get word out that things are changing at KFC.

There are a lot of things that we like about the advertising we've done in the last six, seven months.

It's more contemporary, the user base is being better reflected.

There are some things that you'll see that will be consistent.

The bottom line on this one is the team has got some major news that they're going to announce and I'm not going to really provide a whole lot of color on this.

What we are really striving to do is to make the brand much more relevant, more youthful, and we want to make it, most importantly, more reliable, and that's through better ops, and as we go forward.

So you'll see that.

I'm sorry I can't give you more, but I had the KFC guys beg me to keep my mouth shut for a couple of weeks so I'll honor that request.

Thanks a bunch.

Thanks, Jonathan.

Brian, next question please.

Your next question comes from Mark Wiltamuth with Morgan Stanley.

Hi, good morning.

I wanted to ask about the new menu boards that were coming in for KFC.

They should be rolling out this quarter, sounds like towards the end of the quarter.

Do you think that's enough with the new menu board alone to get the comps moving up or do you need those new product as well?

The new menu board includes on it two new products.

The tender roast strips and the tender roast twister.

We'll also be launching, hopefully in the back half of the year, a chicken salad and we're working on other products as well.

We don't expect, like a miracle to happen, you know, at KFC.

We're building this business for the long term.

As I mentioned to you earlier, we've got plenty of opportunity to improve our ops, but we do think that we're going to build this business from the ground up, again, focusing on the basics, and do it with the notion of sustainability.

For example, this whole tender roast strips that we're having, from that we can make a tender roast twister, an oven roasted twister, we can do oven roasted salads, we've got other meals that we're creating.

We're really going to make that meat block work as an item that can be tied into a number of other products, not just one specific product.

And we think that that's going to make it sustainable and we're going to commit to really communicating the news of this green layer.

So we feel that, obviously, one of the big upsides we have at KFC is the fact that we had a terrible year last year and we feel we can turn this business around slowly but surely, do it the right way, you know, to Janice's point earlier, we do have a portfolio.

We do have Taco Bell, Pizza Hut, it's a great YUM! restaurant, international business, that portfolio gives us a lot of strength.

We don't have to throw the long bomb here, okay?

We can build this thing the right way, and we want to get this business turned around for good.

And so we're really focused on just -- I mean, it's boring, it's not exciting to talk about, but we're talking about just doing the basics better than we've ever done, and giving the customers relevant chicken options that we should have had on the menu a long time ago.

Okay, thank you.

Thanks, Mark.

Brian, next question, please.

Yes, sir.

Your next question comes from David Palmer with UBS Securities.

Hi, thank you.

It looks like -- my question is about multi-branding.

It looks like multi-brand units, as a percentage of franchise units, is still pretty small, around 8%; and that's been up a pretty modest amount, less than a percentage point over the last year.

Is there any chance that we may reach a tipping point with the mind-set of franchisees this year or next year where you kind of get a big bang of acceptance where you grow more like 5% a year and we get to 25 or 50% multi-brand units over the next five or six years?

Is there any chance of that, you know, is there any sense that there may be a tipping point coming?

Yeah, we certainly, it's Dave Deno, we certainly hope to accomplish that.

The biggest thing though, as you look at this, and if I remember the numbers correct, of our new units, about 50% are company and 50% are franchise.

As we start the testing of the various combinations, the company folks lead the way.

So as we test the Pizza Hut WingStreet combinations, it's a company test.

As we've been working through various Long John Silver's options it's company-led.

Over time, the franchisees come on board, as we demonstrate the economics and the possibilities; and I think we are seeing that, and we are going to continue to see that in the future, but clearly the company guys lead the way to start.

You had your franchisee meetings not that long ago.

Is there, you know, at the KFC one, for instance, did you -- is there more of a positive buzz with regard to multi-branding?

Is there something of a mindset shift that is going on there?

I think that, you know, if you went to our franchise system you'd see half of the people would be passionate about it being a good idea and half of the people would be wondering whether it's the right thing to do.

In any situation you have early adopters and late adopters.

What we feel is that in this business economics speak for themselves.

You get the economics right, you show people how the unit looks, and people get to see what customers are thinking and how they're acting, they move on it.

I think we're -- I don't know if tipping point is the right word.

I think we're moving towards that stage.

And right now there's a lot of buzz, a lot of positive buzz and excitement around Long John Silver.

That is a concept that has a lot of excitement.

On the west coast you'll hear a lot of excitement about KFC/A&W's.

In fact Jackie Trujillo, our largest franchisee, said she will open up every KFC/A&W she can get a chance for.

When we did some A&W's in the southeast we didn't have as much success.

So there isn't as much exciting buzz there.

Whether that's was location reason or an operation reason, or whatever, until we deal with that barrier and show people more facts that it works in the southeast there won't be as much excitement about A&W in the southeast as you have on the west coast.

But with Long John Silver there's you excitement everywhere from pockets of franchisees.

WingStreet is a concept that we developed so far just with company stores.

We haven't released any WingStreets to any franchisees.

I think there's excitement about the proposition of WingStreet.

I think if you look at our burger combination we have not released any burger combinations because of testings to Taco Bell.

So we're doing testing.

Once we have the right proof we'll go out and we'll lay out the facts.

Again, when we look at our model, when we're talking about growing our earnings per share at least 10% a year what we're trying to do is build that around no risks, really, no long bombs, no heroic performance, but just running our business better.

Okay?

And we want to be 10% every year.

This year looks like we're going to be at least 12%.

We're very pleased with that.

But we go into every year that we're going to tell our shareholders we're going to get at least 10% a year.

And this allows us to have a mindset of not, you know, throwing the long pass and, you know, unless you've got a wide open receiver.

So we're working on really doing the basics better.

And we think that that's going to pay off for us, and I think, you know, some people said on multi-branding, you don't believe as much in multi-branding because you took your unit number down from like 650 to 500.

That's not the case.

What you're seeing is a reflection and maturity of our company in terms of how we're thinking about ideas, how we execute them the right way and how we really build a really tremendous company over the long term.

Thank you.

Thanks, David.

Next question, please.

Yes, sir, your next question comes from the line of Jeff Omohundro with Wachovia Securities.

Hi.

Thanks.

Just a question on Pizza Hut and the multi-branding efforts over the past couple of years there.

It sounds like you're expanding the WingStreet test a bit.

I'm wondering if we should read into that that that's perhaps moving ahead of Pasta Bravo and kind of your views on multi-branding potential?

Also maybe you could put it in some context about the importance that you place and how big a priority it might be to see a significant move up in through a successful multi-brand effort with Pizza Hut.

Could you repeat the second part of that question?

I kind of lost you there.

Basically just from management's perspective, how big a priority is it?

It's been a couple of years of testing it seems like--Pizza Hut multi-branding, and maybe in terms of context of where we are in this process, if you would help us with that.

We're really basically beginning in the second year of testing.

We did some Pasta Bravos last year and we did WingStreets for the first time last year.

You know, our view is, is that both Pasta Bravo and WingStreet can be successful.

And, you know, when you look at our asset base we have a number of dine-in assets, dine-in-oriented assets, primarily in C and D counties, B, C, and D counties that franchisees run, which need to be upgraded and we think Pasta Bravo is a way to do that for the franchisees that want to take advantage of the dine-in opportunity for Pizza Hut.

WingStreet was an idea that we developed last year that we've put into tests and we feel good about the results that we have, and so we're moving it into the second phase.

So as you look at this, we view both the dine-in and the delivery opportunity to be priorities for us because we've got assets that are driven in both of those directions.

We've got dedicated teams working on each one of these opportunities and we're hoping that by the end of this year we will know more about Pasta Bravo so we can make that as a real recommendation.

We've got franchisees helping us test there.

I just got an e-mail from one of our franchisees down in Texas that's very excited about, wants me to come down and see it.

But that's how things happen in this business.

You've got to have somebody open up the restaurant, he's got to get the sales, he's got to get the profits, and he tells all his franchise buddies about it, and everybody comes down and they take a look at it, and then you get the buzz, and then you get to that tipping point.

We're a long ways from that on Pasta Bravo because it's--the operational complexity is pretty significant.

WingStreet, the operational complexity is not as difficult.

It's something that we're able to execute very well, and so, you know, provided we continue to get great results, that's something I think we can move on much faster than we could Pasta Bravo.

And the investment is much lower, too, by the way.

Thank you.

Thanks, Jeff.

We have time for one more question, Brian.

Yes, sir, your final question from day comes from Eric Elbill with Cinemor Asset Management.

Yes, good morning gentlemen.

I promise I have just one.

Can you comment just briefly on the fact that now that you have, you know, more years experience with the multi-brands, how are they running in terms of comps?

Some of the earlier or older units, and then also by the different concept combination, what differences are you seeing in terms of how those comps are running?

Thank you.

Okay.

Some of our older multi-brands on the comp side are -- the reason why they are happy about some of the combinations are positive.

As we talked about before, the KFC Taco Bell multi-brands have been in the system for quite some time are positive.

We've got -- we're now overlapping some of our Long John Silver's combinations.

Those have been positive.

The KFC/A&W combinations, depending on some locational things can be positive.

They haven't been quite as robust as the Long John Silver's combinations and the KFC/Taco Bell combinations.

As we go forward, as we've talked about, we really are using Long John Silver's as our lead multi-brand partner and we still feel excited about A&W, especially with Long John Silver's but that's how we're going to roll this thing out.

Finally, David just talked about Pizza Hut/ WingStreet and Pizza Hut/Pasta Bravo, those are relatively new but we like the economics around those brands.

Thank you.

We'll -- let me wrap it up, Tim, is it time?

Okay, first of all thank you for being on the call.

As you look towards 2004, we're very pleased that we've been able to take our EPS up to 12% versus our 10% ongoing for the year.

I hope you get some comfort that we're dealing with the issues that you inevitably face when you run a business like this.

We're dealing with the cheese commodity issue, I think, in a very smart fashion and we'll handle it.

The avian flu issue is behind us.

Our international team is doing an outstanding job and has all the potential to have a very, very strong year.

We feel confident about the U.S. because of the programs that we have in place and the operational focus that we have that is just designed to help us get better and better and more and more reliable with our customers.

Our balance sheet is stronger than it's ever been.

We're really proud and had a big celebration around the fact that we are now investment grade.

So as we go forward we're going to treat this company as a core growth company with a global opportunity, and we're going to give our shareholders the benefit of share buybacks and we're strongly going to consider a dividend with the context that I talked about earlier.

So thank you very much, and appreciate your support.

Ladies and gentlemen, this concludes today's YUM!

Brands first quarter 2004 earnings conference call.

You may now all disconnect.