百勝餐飲集團 (YUM) 2005 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the first-quarter earnings conference call for Yum!

Brands.

After the speaker’' remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Tim Jerzyk.

Sir, you may proceed.

Thanks, Kimberly.

Good morning, everyone.

Thanks for joining us on the call.

Before we begin, I’d like to go through the few necessary things: This call is being recorded and will be available for playback.

We are broadcasting the conference call via our Web site, www.yum.com.

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

I would also like to advise that this conference call 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.

The information in this conference call related to projections or other forward-looking statements may be relied on subject to the Safe Harbor statement included in our earnings release last night and may continue to be used while this call remains in the active portion of the company’s Web site at www.yum.com, which will be until Midnight, May 6, 2005.

On our call today, you will hear from David Novak, Chairman and CEO, Rick Carucci, our CFO, and Dave Deno, our Chief Operating Officer, has also joined us for the call.

David Novak and Rick Carucci will follow with remarks, and we will then take your questions.

Now I’m happy to turn it over to David Novak.

Thank you, Tim and good morning, everybody.

As you probably saw from our release last night, we had a great first quarter, starting off 2005 very well.

EPS of $0.53 per share and 14% growth.

This earnings growth was led by continued strong sales performance from across the Yum! portfolio of businesses, including all three leading U.S. brands and both the international and China divisions.

Interestingly, this was one of the best quarterly performances ever by the U.S. business in terms of same-store-sales growth.

We had plus 4% this year in Q1, lapping plus 3% a year ago.

The international division had system-sales growth of 7% prior to foreign currency conversion versus our target of at least 5%.

This strong top-line performance from each of our businesses helped offset continued challenging U.S. commodity costs and enabled us to deliver 14% growth in EPS.

Importantly, we are confident we have solid plans in place for all of our businesses for the balance of 2005.

Our operations are making steady progress; product pipelines around the world are robust with good crossover of U.S. and international ideas, and brand positionings are sound.

As a result, we’re confident we will once again grow EPS at least 10% in 2005.

When we do, this will be our fourth straight year of double-digit EPS growth.

Frankly, we were on our way to an even better year until we hit what we believe is a short-term bump in the road with our China business.

As you probably saw in our release last night, the KFC mainland China business has had its sales negatively impacted by an ingredient supplier issue.

Importantly, the supplier issue was quickly resolved.

Based on current China KFC sales trends, the low point in sales declines occurred the last week in Period 4, which we just reported last night.

We think the market is on a path to recovery, but it will take some time.

As we noted in our release last night, Period 5 system sales will be down 5% and second-quarter profit will be impacted.

The great news about our company is that in addition to China, we have a portfolio of leading U.S. brands and a great international business, and they are performing quite well.

That is why, as I said earlier, we remain confident we will once again achieve our annual commitment for at least 10% growth in EPS.

Now I will review what I see in each of our businesses and talk about their plans and trends.

In China, the team is moving very aggressively to remedy the issues affecting KFC sales.

We believe that sales will improve over the near term with the chicken promotion and the launch of a new signature product in the second half of the year.

Our development plans for KFC continue because returns are so strong.

KFC is the leading restaurant brand in China and continues to widen the gap versus our nearest competitor every day.

Pizza Hut also now has 164 casual-dining locations and is clearly the leader in that category.

From the looks of our progress to date in opening new restaurants for both KFC and Pizza Hut, I would say the China team has a good chance of beating our annual target for new China openings and, of course, with excellent financial returns.

We just opened our second Chinese fast-food restaurant called East Dawning.

Initial customer response to the food and facility is outstanding, and we’re optimistic about its mainstream appeal.

Obviously it’s early days.

We are also continuing to test our Taco Bell casual-dining concept with two new openings in the first quarter.

The team is also making good progress with Pizza Hut home service concept to capitalize on the convenience of the delivery occasion.

You will see more of these open this year.

The fact is is we’ve never been more bullish than we are today about the long-term prospects for KFC, Pizza Hut and potentially other Yum! restaurant brands in China.

I just returned from one of my regular trips to China and I had an extensive review of the China business.

And I can say confidently, more than ever, that our strategy of building dominant restaurant brands in every category is the absolute right path.

We have the strength and the team, brands and infrastructure to leverage China growth in a big way.

Now on to our Yum!

Restaurants International Division, YRI, which, let me remind you, excludes China.

We are very pleased to see strong performances across our international businesses.

We achieved 7% growth in system sales, local currency basis.

This is ahead of our target, and we are seeing steady new-restaurant development, combined with positive same-store-sales growth in most of our major markets.

With the exception of our South Korea business, we are happy with results, particularly with substantially improved performance in Mexico and continued unit growth in same-store sales growth from all of our regional franchise-only businesses.

The details are in the release for you to take a look at.

I’m extremely excited about how we are leveraging our scale and sharing best practices around the world.

A great example is in the U.K., where Pizza Hut is one of our bigger international division businesses.

We just launched the 4ForAll pizza, which, as you recall, was a big hit in the United States last year.

We are optimistic it will be a big hit in the U.K., as well.

I’m also excited to see our new-unit growth continuing.

Our international franchisees are leading the way, and we are on track to open at least 725 new units this year.

A great example is in the Middle East/North Africa region.

We will open over 70 new restaurants on top of 700 — a 700-restaurant base, and at the same time we’re growing our same-store sales in a consistent manner.

Remember, this is in the Mid-East.

For the fifth straight year, we expect to open over 700 new system restaurants in our Yum!

Restaurants International Division, excluding China.

The incremental revenues from these new restaurants, combined with the generally strong base-business performance we are seeing around the world, give us confidence that we will continue to grow our international division profits in the 10% to 15% range once again in 2005.

In the United States, we also have solid sales momentum and new programs backing us up.

First, some perspective and outlook for Taco Bell.

In Q1, Taco Bell delivered outstanding results again, with 5% same-store-sales growth.

This was the eighth consecutive quarter of this performance, and it remains one of the best QSR performers.

Taco Bell, the second most profitable QSR brand in the United States, now has system average-unit volumes approaching 1.1 million.

Importantly, franchise profitability and optimism is outstanding.

These results come from steadily improving operations, a robust product pipeline, great RAM positioning and excellent marketing.

The Big Bell Value Menu continues to demonstrate leadership in the category, and the chicken enchilada Grilled Stuft Burrito was a very popular limited-time-only line extension in Q1.

I love that product, and I can’t wait until it comes back.

Taco Bell’s CHAMPS measures continue to show solid improvement, and their rallying cry for their system continues to be exceptional execution of the basics.

Certainly we expect another year of strong same-store-sales growth for Taco Bell.

Now onto Pizza Hut.

Q1 was another good one at Pizza Hut.

Our seventh straight quarter of positive same-store sales growth.

In fact, Pizza Hut grew same-store-sales 3%.

This lapped an extremely strong year-ago first quarter with the very successful 4ForAll Pizza launch.

Sales last year were up 6%.

Pizza Hut did this by remaining the category leader in terms of innovation and excitement.

This year, we launched the very innovative Dippin’ Strips Pizza, which gives our customers the ability to dip their pizza, cut into strips, into three different sauces.

Pizza Hut is the industry leader in innovation so you can count on more product news balance of year.

Pizza Hut is also steadily improving its operations and is the first one of our brands to achieve 100% or lower in team-member turnover two years in a row.

We are also very excited that Pizza Hut is making good progress leveraging and upgrading restaurant assets.

For our very substantial delivery business, we’ve created a new brand, WingStreet, to deliver a tasty line of sauced wings and boneless wings.

This multibrand combination continues to perform well, and expansion to new markets continues.

It’s a profitable way to leverage our delivery distribution system by exciting our customers with an additional line of branded products.

We also created another brand for our dine-in business called Italian Bistro.

It’s a line of pastas, salads, sandwiches, gourmet pizza in an upgraded decor and service level.

Our franchisees are very excited about this option for the Pizza Hut dine-in business.

You will likely see another 300 to 400 Pizza Hut WingStreet combinations added in 2005 as well as about 100 additional Pizza Hut Italian Bistros.

For the balance of 2005, we fully expect to see a continuation of positive sales results at Pizza Hut because of the significant work that we have done across all aspects of the business, the news we continue to have in the hopper and our maniacal focus on operational improvement, particularly in the area of customer access.

We are also very pleased that KFC U.S. has begun to turn the corner.

We now have five straight periods of positive same-store sales.

KFC’s launch of the Snacker, a quality chicken sandwich for $0.99, was a success and the product continues to do well.

The KFC U.S. team picked up this product idea from the U.K.

KFC business, and it adapted it for the U.S. markets.

This is another example where sharing best practices of a global business is one of our distinct advantages.

At this point, we are pleased that KFC now has five straight periods, as I said, of positive same-store sales growth.

But it’s too early to take a victory lap, but we remain cautiously optimistic that we are turning the corner for even better performance in 2006.

Again, more work needs to be done this year, and the team is working very hard to improve all aspects of the KFC brand in the U.S.

When you look at our entire U.S. portfolio, our blended same-store-sales target is to be up at least 1% to 2%.

We were up 4% in Q1, and certainly it looks like we have a chance to exceed our target again this year.

We also continue to make progress pursuing what we think is a breakthrough strategy in our industry, multibranding great brands in the U.S.

In the first quarter, we passed the 2,700 mark in number of U.S. multibrand units, representing 15% of our U.S. system.

For all of 2005, we expect to add another 550 multibrand units.

As you can see, we already have a sizeable multibranding business.

We intend on maximizing every multibranding opportunity where the customer says yes and returns are excellent.

We are optimistic about the multibranding of Taco Bell and Long John Silver’s.

And we are still testing the Long John Silver’s and A&W combination.

And as I said earlier, we currently have 399 WingStreet units and are looking to add over 200 more the rest of this year.

We are also discovering the power of signage and concept layers with our newly created Italian Bistro concept, and our Pizza Hut franchisees are very excited about what we’re doing with our dine-in business.

We are as bullish as ever on the prospects for multibranding and its ability to improve average-unit volumes.

Last but not least, the power of our global portfolio of leading restaurant brands makes us not your ordinary restaurant company and a cash generating machine.

We continue to build a stronger balance sheet, buy back our own stock at record levels and pay a meaningful dividend.

We will continue to build value by executing the unique growth opportunities that differentiate us from the competition and make us not your ordinary restaurant company.

Specifically, we will focus on our four key strategies: building dominant restaurant brands in China, driving profitable international expansion, improving restaurant operations and multibranding category leading brands.

Our ongoing goal is to increase EPS at least 10% each year, and you can expect at least 10% earnings per share growth in 2005.

This would be the fourth consecutive year of solid double-digit EPS growth.

Before I turn the call over to Rick Carucci, our CFO, and he will give you more details on Q1 and our outlook for the year, let me wrap up my comments.

When you step back, our overall business remains strong.

Our U.S. business, led by our three leading brands is performing very well.

Our first quarter same-store-sales growth was one of the best we’ve ever had, and it lapped an excellent first quarter of last year.

Our Yum!

Restaurants International Division is having a very good year with broad-based sales growth, which is above our target.

China had an excellent first quarte,r and we have an unparalleled opportunity for long-term growth.

An otherwise great performance is being dampened in the second quarter as we are taking a short-term hit in China.

Nevertheless, we are expecting to deliver our full-year target and, once again, deliver at least 10% EPS growth.

If there’s one thing that we’ve demonstrated over time: We manage issues in a straight-forward fashion and know how to leverage the power of the Yum! portfolio.

Now, let me turn it over to Rick Carucci, our CFO, who will take you through the numbers.

Rick?

Thank you, David, and good morning, everyone.

I’m going to discuss several items today.

I will provide a brief first-quarter review.

I will share some perspective on our full-year 2005 outlook and why I’m confident we will meet our target of at least 10% profit growth.

I will briefly review the outlook for the second quarter.

You will see that although we expect a tight Q2, we have not changed our prior EPS forecast of $0.56.

Finally, I will provide a summary of our cash flow expectations and reiterate our plans for this cash flow.

Let me begin with the quarter-one review.

We came in with EPS of $0.53 for the quarter or 14% growth.

That was $0.01 to $0.02 better than we previously thought as each of our businesses ended the quarter just a little stronger than expected.

Overall in Q1, the sales across all of our businesses around the world and in each of our three leading U.S. brands, were some of the best we’ve ever seen.

Partially offsetting this strong sales performance was continued higher U.S. commodity costs.

The higher commodity costs are primarily driven by chicken, beef and cheese.

This was a 2-percentage-point negative impact to U.S. restaurant margin $22 million in the quarter.

We were able to offset more than 1 point of this impact with strong sales.

Despite the U.S. commodity headwinds, the 14% EPS growth should give you a sense of our earnings power and the brand strength and geographic diversity of our business.

This is key to our ability to drive consistent growth as it allows us to offset unexpected issues.

We expect 2005 to be a successful financial year for our shareholders because we expect to deliver the following: First, a fourth consecutive year of double-digit EPS growth.

We also expect another record year of cash flow from operations, and we expect even more cash — free-cash flow than last year.

Now let me take you through 2005 in more detail.

You will see that how we currently plan to deliver at least 10% growth has changed from previous expectations.

Our international and U.S. businesses will be driving performance and offsetting near-term challenges in our KFC China business.

While we wish we did not experience the current sales decline in China, we are very fortunate to have a portfolio of businesses that allows us to offset this challenges.

As you have seen from Yum! in the past, we have been able to consistently provide offsets to short-term issues and still drive solid growth years.

So the question is why am I confident we will deliver another good year in 2005?

There are three main reasons: First, our Yum!

International Restaurant Division, YRI, is as strong as ever.

Second, we continued strong U.S. sales to result in stronger domestic profits in the third and fourth quarter.

Third, we are very well positioned in China when sales do rebound.

I will now take you through more detail on each of these items.

Our first reason for confidence is that YRI sales and new-unit development are as strong as ever and exceeding expectations.

For the first quarter, system sales growth of 7% and local currency exceeded our ongoing target of at least 5%.

Unit growth is at a plus 3% run rate and same-store sales are solidly positive.

We are also seeing strong growth in the majority of our markets.

The only key market with weak sales has been South Korea.

Japan and Mexico are having very strong years after struggling the past few years.

Importantly, all of our franchise-only markets are solidly positive in same-store sales.

We are having especially strong results in the Middle East, southern Africa and Asia.

We also expect another strong year of new store development.

In the U.K., we’re continuing to expand at a healthy rate and expect to open more than 100 units this year.

We also expect to open over 200 franchised new units in Asia this year.

Overall, this would be the fifth year in a row with more than 700 new-restaurant openings for YRI.

Importantly, it is looking increasingly likely that the International Division will be at the high end of the plus 10% to plus 15% range in operating profit for 2005.

Our results are good so far, and we have very good trends in this business.

Our second reason for confidence is that we expect to deliver stronger domestic profits in the second half of 2005 due to stronger sales and improved commodity cost picture.

We are growing same-store sales across all of our brands with KFC on a nice path of recovery.

Looking at it another way, we lapped last year’s quarter-one blended U.S. same-store sales growth of plus 3% with a plus 4% this year.

That is one of the best two-year quarterly growth rates in the past five years.

The results of this is due to many factors.

An important factor is a strong, new-product pipeline that resulted from improved discipline and process in this area.

We expect these strong sales to translate into stronger balance-of-year profitability.

Year-over-year commodity costs are expected to improve.

In fact, by the fourth quarter, we currently expect a slight upside in commodity costs versus 2004.

The price increases in our key commodities occur the second half of 2004.

Therefore, the gaps in commodity costs between 2005 and 2004 get reduced over the course of the year.

Now, the third reason I’m confident is that China Division is very well positioned for when sales do rebound.

China’s profit growth is largely driven by new-unit growth.

The China Division already opened 100 new units in the first quarter.

We expect to build at least 375 new units for the full year.

Therefore, we are well on our way to exceed 20% unit growth during 2005.

Between 2001 and 2004, we increased profits in our China Division by roughly 20% — 25% per year.

Importantly, this profit growth included significant negative short-term sales results, caused by SARS and Avian flu.

Our China business has proven to be very resilient, and sales bounced back strongly from these two events.

Therefore, we have strong unit-growth history and a history of a resilient business in China.

In addition, as those of you who attended the investor conference in Shanghai can attest, our confidence in China is based on having an outstanding management team, strong brands, quality assets and world-class operations.

Let me move now to the quarter-two 2005 forecast.

For the second quarter, we confirm our prior EPS forecast of $0.56 per share prior to special items.

Negative sales at KFC restaurants in mainland China are included in this forecast.

Our estimate is a $20 to $25 million profit impact.

This makes this a very tight quarter.

We expect our international division and our U.S. businesses to perform better than assumed in our earlier Q2 outlook.

Additionally, we expect $0.01 upside from foreign currency conversion.

For the second quarter, there is a strong possibility of an IPO in our Poland/Czech Republic joint venture.

This transaction would generate a one-time gain of at least $15 million.

Assuming this IPO does occur, the company anticipates the possibility of additional facility actions in the second quarter and balance of year.

We have not factored this into the outlook.

You will note that in the release last night, the quarter got off to a very good start with solid Period 4 sales results.

Taco Bell same-store sales was plus 5%.

KFC was plus 4%.

And Pizza Hut was plus 4%.

Please do keep in mind that Pizza Hut had a very successful plus 10% sales growth in Period 5 of 2004.

This will be challenging to lap.

As always, you can track our progress during the quarter as we provide you with International Division, China Division and U.S. sales updates every four-week period.

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

Before I wrap up, let me briefly review our strong cash-flow generation.

We expect a record 1.2 billion in net cash provided by operating activities in 2005.

We expect to spend $720 million in capital spending, so free-cash flow will be substantial again, over $500 million.

In addition, you could expect from us you’ll generate — sorry, in addition, we’ll generate an additional 100 million from re-franchising, at least 150 million in employee stock-option proceeds and about 150 million from sales of surplus property, equipment and other items.

That’s nearly $900 million of available free cash.

Consistent with our previously stated approach, we expect to deliver most of this cash back to our shareholders.

For 2005, you should again expect to see solid progress with our share repurchases.

We currently have an open authorization to purchase $500 million, and we already repurchased $116 million in the first quarter.

We have virtually no debt that comes due during 2005.

We are just completing our first full year of paying regular quarterly dividends, a total of $0.40 per share per year.

With our earnings increases we are at the lower end of our planned payout range of 15% to 20%.

We plan to review our dividend and our share-repurchase strategies at our next Board meeting.

Over the next three years, we expect to see growing levels of cash flow.

As this occurs, our balance sheet will continue to strengthen, and our key financial ratios continue to improve.

As a quick recap, we had a very solid Q1 of 14% growth.

We reiterated our Q2 and full-year EPS targets and expect to have double-digit EPS growth for the fourth year in a row.

Finally, we expect another very strong cash flow year and to return the bulk of this cash to our shareholders.

Back to you, David.

Thank you very much, Rick.

It’s great to have you in had the CFO world.

As Tim mentioned earlier, we also have Dave Deno on the call, who is our Chief Operating Officer.

And what we’d like to do now — and by the way, I’m going throw all the hardballs to Dave now [ laughter ].

But what we’d like to do now is take any questions that you have.

[OPERATOR INSTRUCTIONS ] Your first question comes from David Palmer with UBS.

Hi.

A question about pizza, the category.

Could you do an assessment, if you wouldn’t mind, of the competitive environment this year and how you see it shaping up?

Perhaps, particularly with regard to cheese prices, you know, if they get — if they go lower, can it typically mean that the competition gets more price competitive?

Is that something we should even be thinking about, especially in light of the in fact your innovation seems to be getting going?

I will leave it there.

Thanks.

Well, you know, we’ve always said, and we continue to believe, that the pizza category is our most competitive category because you have two very strong and solid national competitors with Domino’s and Papa John’s.

So, it’s always a knife fight.

And we’re battling that day in and day out.

You know, we think that — frankly, we see competition emulating more of our strategies.

Trying to innovate around specialty pizzas.

And so we see this being a primarily an innovation war right now because I think everybody is looking for ways to protect their margins and still drive their sales.

So, you know, we think right now the biggest battle is happening on the innovative fron,. which we feel good about because we think we can go toe to toe and frankly have an edge in that area versus our competition.

You know, should cheese prices get lower, you know, we think we’re dealing with two competitors that, you know, would also like to see margins improve.

So, we don’t see any — we don’t necessarily see anymore of a price war than we typically have.

You know, in the category, you have your national advertising, which typically features your major new-product news.

But there’s also lots of couponing and leafletting and inserts that really provide that day-to-day value and we see that happening at our major competitors, and we see us doing the same thing, as well.

So, don’t see a whole lot different.

Your next question comes from John Glass with CIBC World Markets.

Thanks, good morning.

Just to go back to the China issue for a moment.

Could you maybe talk about what the low point has been in same-store sales?

What they are today and maybe how the progression has worked?

Is my math correct, for example that P5 comps are going to be down roughly 25%?

Yes we’re — this is Rick, the CFO, we are not going to talk about daily sales or weekly sales.

We’re going to confine our comments to period sales, which we released at P4, and we will continue to release.

As we said in the earnings release, we do expect the worst week — I’m sorry, the worst period of sales to occur in Period 5.

And that would reduce roughly — that would reduce system sales by 5% for that period.

And unit growth has been running about 20.

Okay.

And you liken the situation a little bit to SARS and Avian flu, but unlike those episodes it’s more brand-specific.

So, could you talk about from a public relations standpoint, what you’re doing in China to encourage customers to come back?

Okay, well, you know, we’re confident that we’ll eventually bounce back, because, number one, we know that consumers really love our products and our experience.

We have one of the strongest consumer brands in China and by far and away, the largest restaurant brand.

And with the scale of over 1,300 KFC restaurants, we have the power of a great marketing budget to get our messages out and bring our customers back.

And so we’re basically advertising our chicken products and chicken news, and we have outstanding pipeline for the balance of the year in terms of new products.

We also have excellent operations.

And each store in China has local store-marketing coordinators, who are going out in the trade area and talking to the businesses and schools to reassure our customers.

And what we’ve been doing with our marketing the last couple of weeks is just basically assuring everybody that our products are safe, and that you should — you can enjoy them with 100% confidence.

And I think the thing that we really feel good about is anyone who’s been to China and studied our business knows that we have an outstanding team that’s obviously now working round the clock to build the business back.

Just like we did when we persevered through SARS and the Avian flu.

And I guess just one other final point as I think about it here, you know, one thing I’m sure of is that we’re going to solve this problem over time.

But I’m just as sure in the future that we will have more ups, okay, and we will have some downs that we can’t foresee, but one day, I continue to believe that we will have more restaurants in China than we do in the United States.

So, we’ve got a short-term issue, we’re weathering the storm with lots of clout, with lots of muscle that you know a leader has.

And the long-term issue that we’ve continually talked about exists.

And we’re continuing to add our new units at the same rate that we talked about previously.

Next question comes from Joe Buckley with Bear Stearns.

Thank you.

Just to continue on the China question for a moment.

Talk about what is Sudan 1?

What is the health risk associated with the product?

What’s the Chinese public heard about the product?

Okay, the ingredient issue we had was — is basically — it’s a red coloring dye.

It’s used in chili peppers, and it’s unapproved for food use.

Minuscule trace amounts were discovered in basically four of our products.

We immediately pulled those products, and they’re now back in our stores.

I want to emphasize the reality is we have no health risk.

No one has gotten sick in China or will ever get sick because of this incident.

We do have a PR issue we are dealing with on a city-by-city basis.

Because the isolated incident received a substantial amount of adverse press coverage.

And this is what led to what we believe is the short-term sales issue that we have in the marketplace.

So, I think, you know, what’s happened is, is that, you know, Sudan red is a pretty scary term, okay?

There’s been a lot of sensationalistic headlines in the press.

It’s been brand-specific, and as a result, we’ve been hit.

But just to kind of put all of this into perspective, this is not a known human carcinogen.

There was such a minuscule amount of coloring added that an average consumer, this is — basis our outside experts who we’ve talked to, would have to eat 54,000 hot wings a day for an entire lifetime before they would remotely ever have a health risk.

So, we have a lot of truth on our side as we go forward.

What we’re doing right now is we’re communicating that fact and going out with our local store-marketing coordinators, using our national marketing to deal with the issue.

And hopefully we will see a rebound.

Just two more related questions.

Was the business that we witnessed in Shanghai and Hangzhou, was that business depressed?

When you saw the business, Joe, you walked in there, just like I did.

I was there, I came in the week after you were there, and it was just a trip that I had planned, you know, six months ago, okay?

You saw the transactions that we have in our KFC.

We have a great business.

I think what Joe’s referring to is the stores are very crowded.

You know, we have a high, high transaction business.

It’s a great business.

And even with the shortfall, I think we — well, I know with the shortfall we have one of the best businesses in China.

Okay?

What we want to do, though, is get it back to the supremeo business that we had again.

But you saw the business exactly the way it was when you were in those stores.

Just to be specific, Joe, you saw it at one of its worst weeks.

And then — just last question, how have your new-opening volumes been affected during this?

Are the new units still opening well?

Or are they impacted, as well?

Yes, we have not seen any difference in new-unit opening sales versus our regular sales.

And, you know given that, we still have the confidence to open the — the new restaurants.

So, we’re not taking a step back at all on development standpoint.

And our returns in China, as some of you may know, are just outstanding.

So temporary sales decline, it really doesn’t impact our investment returns very much.

And they’re still well below — well above our hurdle rates and still among the best in the world.

Yes, and also, Joe, this is Tim Jerzyk.

We will put the worst of the slides from that presentation, they will be up on the Web site probably before the end of this week.

And there is a — just as a reminder, the returns that we’re getting in KFC China are 2.5 times our hurdle rate.

So, we are — as Rick said, they’re very, very good and they’re well, well above our hurdle rate.

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

In the context of returns, can you talk about investment in the business in the United Kingdom?

Specifically we see obviously the company reported margins there, which are okay, but certainly not where you want them.

We know that the market there has been relatively flat in terms of same-store sales and it’s known to be one of the more expensive markets to do business in and certainly most competitive.

I think in your comments you said you’re opening 100 this year.

So, could you walk through your commitment to the U.K. market in terms of future growth?

Thanks.

Yes.

First of all the, we’ve been opening about an average of a 100 units a year for the last three years, as well.

So, what we’ve been doing in the U.K. this year has not been out of the ordinary.

It’s a continuation of our commitment to that market.

If you look at our new-unit growth historically, it’s been fairly evenly divided between Pizza Hut and KFC, probably about 60% Pizza Hut, 40% KFC.

And the margins that we’ve had in those businesses over time have been quite strong.

And when we look at our returns on investment in those markets over time, they’ve also been very strong.

So, Pizza Hut U.K. is one of our strongest Pizza Hut markets in the world.

KFC U.K., although this year is off a little bit in margins, has always been a strong investment market for us and a good performer as well.

So we have not had some of the issues that some of the other folks had had in the U.K. historically.

We’ve had a very good business there.

And John, that’s one thing, on Pizza Hut U.K., because it’s a joint venture, you don’t see the company margins, but as Rick said, that’s one of the strongest businesses we have in the world.

That was my follow-up.

And if I may ask a separate subject, and maybe this is a question for David Novak.

I know there’s been some press on a change of KFC positioning back to Kentucky Fried Chicken and a return to the South.

I mean could you maybe give some clarification to that, in terms of if that’s if fact where you’re taking the brand, and what’s making you go in that direction?

Okay.

It’s really not a change in positioning, John.

It’s been basically what we’ve been working on last couple of years.

We’ve been really trying to contemporarize the brand and what we’ve characterized as old school cool.

And I think we’ve talked about that in the past.

You’ve read about an asset that we just developed here in Louisville that does give us more of a southern feel in terms of some of the products that we’ve developed, like chicken mashed potato bowls, collard greens, buttermilk popcorn chicken, sweet potato pie.

These are things that are kind of — give us a little bit more uniqueness.

We’re testing it, but the big thing I think we’ve done here in Louisville is try to really capture old school cool.

The blend between the contemporary, making our brand contemporary and really capturing the great heritage that we have in a brand.

You know, brand heritage can either be — it can take you forward or hold you back.

Okay?

What we don’t want to do is live in the past at KFC, we want to leverage the great strength of what KFC has been in the past, but take it forward in more contemporary fashion.

And that’s what this asset is all about.

But we’re really positioned as world famous chicken.

We’re going to continue to lead.

And try to get better and better at leading at product innovation.

And the imagery that we’re really trying to drive is old school cool.

And that’s what you read about in the press.

On top of that, John, it’s Dave Deno, I think the thing that we have from an operations standpoint is it’s our single biggest opportunity at Yum! is to continue to improve our KFC operations.

We’re working very hard on that.

In fact you’ll be interested to know I’ll be up in our KFC business in New York over the next two days, talking about just that.

And I think that with the concept changes, along with our operating improvements, we’re quite excited about the future of KFC.

Your next question comes from Tom Zankel with Iridian.

Hi.

I just wanted to confirm that relative to the Q2 confirmation of guidance, this is in spite of the China hiccup, and these earnings will be achieved without the benefit of the IPO?

Yes, this is Rick Carucci.

That’s true.

The $0.56 includes the China issue, estimated at $20 to $25 million for the quarter.

It’s a very tight quarter without the Poland IPO, but that’s our estimate.

So due to the rest of the business — the diversity of the brands and geographic diversity you can withstand the storm?

That’s what I was talking about, you know, the power of our portfolio.

This is what makes us not your ordinary restaurant company and what we’ve been stressing for a long time.

You know, we have an international business, which we’re uniquely positioned in China, and built the business to the extent where we now have that reporting separately into Yum!.

Then outside of China, we got a great business where we have 600 franchisees or open over 80% of our restaurants with high returns.

And then we’ve got the three leading brands, where we have the opportunity for operational improvement, and you see, this quarter, we had 4% blended same-store-sales growth and we’re getting — we’ve got a good track and good momentum at each one of our U.S. brands.

And then the other point of uniqueness we have is we’re leading the way in multibranding, which we think is going to help us get higher volumes, higher returns and hopefully new-unit development at some point in the U.S.

So, these are the things that give us a portfolio that has allowed us to — we’re never going to have everything hitting on every cylinder.

But we can get it — that’s why we feel very confident we can get at least 10% EPS growth.

Weather whatever storms happen each year and still deliver, so our portfolio is a big advantage.

The next question comes from Conrad Lyon with Key McDonald.

Hi, good morning, I’m actually sitting in for Jonathan Waite.

Two questions here, one is CapEx.

It looks like you’re taking it down for the year.

I just want to see why that is?

And it looked like you had some improvement on the labor line in Q1.

And I wanted to see why that is?

Thanks.

Yes, the first part on CapEx I’ll answer, which is just a refinement of the forecast.

The original forecast in 2005 was built on where we thought 2004 would end up.

That ended up coming in a little lower than we expected, so this is really just refining the forecast on CapEx.

Conrad, this is Tim Jerzyk again.

The second question on labor — improvement in labor costs, a couple of things there.

The U.S. was very, very good.

And it was a reflection of the leverage that you get on the positive comps of 4% that we had U.S. blended.

The other thing you have to keep in mind when you’re looking at Yum! worldwide, over time that’s going to be driven down, just by the mix of the business changing to more international and more China — more China sales.

Because the labor costs, if you look at it by segment, they’re lower in China, and they’re lower in YRI than they are in the U.S.

Those two factors.

And I just — one thing I’d like to add from an operations perspective is that we’re really trying to focus on making sure all of our restaurants operate at a consistent labor standard.

They’re meeting their flow through and labor targets every period, every week, every day.

And we saw year on year — we saw a pretty consistent increase across all of our brands, the percent of restaurants achieving their financial targets.

And so that’s how we’re trying to drive productivity in the restaurants, by having people meet their financial targets.

Not blow them away, but we had an opportunity, I think, to get after some of the people who weren’t meeting their targets.

And one other, just a point on the CapEx, is it is a refinement and every development number that we said we were going to hit in 2005, we will hit.

The next question comes from Steven Kron with Goldman Sachs.

Thanks, good morning.

Two quick questions, both related to earnings guidance.

The first is you’ve indicated that you expect the U.S. same-store-sales strength to continue, but you also kind of reiterated the 1% to 2% rest of the year target in the U.S. for same-store sales, but suggesting you may exceed it.

I guess my question is if you do exceed that 1% to 2%, is that upside to your guidance?

Or do you need to exceed that to get to your 2.60 at this point?

And then the second question is more thinking about kind of 2006.

If this China issue really proves to be a short term, as we expect, and costs around $0.05, it would suggest that the earnings power this year would have been substantially greater than 10%.

So, if we think about 2006 and all else being equal, off of a seemingly depressed 2005, should we be thinking of something greater than 10%?

Or are you just sticking with your greater-than-10% guidance?

Let me answer the second question first and that’s — so many things occur in the year, ups and downs, it is just way too early to get into 2006 at this point.

You know, clearly we hope as we bounce back from this we’re not going to have any other event in 2006 in China.

But it is just too early to speculate for the first — for the full year for Yum!.

Regarding the same-store-sales increases in the U.S., we don’t forecast comps out.

Our forecasts that we put into our guidance, we are able to achieve at levels that we’ve — based on what’s occurred year to date on levels that we have previously provided for guidance.

But you indicated in the prepared remarks, I believe, unless I’m wrong, that you expect kind of the 1% to 2%, but you might exceed that.

I was just wondering whether the 2.60 bakes in exceeding that or within the 1% to 2% range?

David said at least that, and I think it’s fair enough to say at this point that it’s at the high end of that range.

The next question is from Mark Wiltamuth with Morgan Stanley.

Hi, question is for Rick on the U.S. food costs.

You stated that things should be getting better.

I just want to clarify.

It sounds like you’re still looking for year-over-year increases through the third quarter for food costs and then maybe by fourth quarter things actually of shift to a year-over-year improvement.

Is that accurate that the drag is just less, but we don’t really get the positive until the fourth quarter?

Yes, essentially what occurred is that most of our price increase occurred about the middle of last year.

And so it’s occurring as we go through each quarter.

The lapping of the prior year is much better as the year goes out.

So, that’s why the first quarter this year was such a large number.

As we took into account the price increases in the back half of 2004.

We’re hoping, as you said by 2005, since most of our increases occurred in the back part of 2004, that we’re not really assuming a price decrease except for cheese versus that level.

The rest we’re assuming about the same prices as prior year.

And so it’s a small cheese upside that we’re assuming that gives us the benefit in Q4.

Next question comes from Rachael Rothman with Merrill Lynch.

Good morning, guys.

Just a quick question on your labor margins in China.

I’m sorry if you addressed this at the meeting when I wasn’t there.

But if you could talk about how sustainable it is over the long term?

Because looking back, since 2000 it looks like your labor costs have increased about 220 basis points as a percent of revenue.

Is there a lot of wage pressure in the market now?

What’s your outlook going forward there?

It’s hard to project too far out.

There has been — there is getting more and more demand on labor in China.

We are seeing more pressure than we have in the past.

One of the benefits that we have is we are a very desirable place to work in China.

We’re the preferred employer.

So we’ve had a very good track record of being able to hold on to our folks in China.

But, yes, we’re subject to some of the same labor pressure, but keep in mind the impact that that would have.

Our labor rates in China are so low.

They’re about 10% of sales, that even if you had a 10% increase in labor, that’s only a 1% impact.

So, the types of — you have to remember, you could have higher than normal wage inflation, but it’s off of such a low base, it will be quite a while before it materially impacts on margins.

And I think, Rachael, this Tim Jerzyk, over the long term that you’ve talked about, also, they’ve reduced food costs substantially, as well, with supply-chain benefits.

And I think it’s fair to say that the China team is working still on that.

They do expect labor costs to go up.

Part of it is also — small, small part of it is as they roll out breakfast labor costs, they’re a little bit higher than the average.

So there’s a little bit of a mix impact.

Okay, thanks.

And do you mind one more on share repurchase, if you would?

Sure, go ahead.

I know you guys had previously got into a share count of 295 to 300, and I didn’t see an update in this press release.

Given that you guys were an average share count of 305 in the first quarter, and I think you said you had about 400 million outstanding under your authorization, do you think that’s still achievable?

Yes, we didn’t change the guidance because we still think that range achievable.

The next question is a follow-up from David Palmer with UBS.

Hey, guys, could you give us a rough idea of how much of 1Q same-store-sales growth at the big U.S. brands was price and mix?

By brand, Dave —

Yes.

Taco Bell was about 1.5 points transactions.

The rest was price mix.

KFC was all transaction.

These are rough numbers.

We’ll have them finalized in the "Q."

And Pizza Hut was all price mix.

The next question comes from Andy Barish with Banc of America Securities.

My question was just answered, thank you.

Thanks, Andy.

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

I just have a big picture question for David Novak.

With that [Allied/Domecq] Duncan Donuts is available, there’s some talk about Wendy’s earlier this week.

Just curious if you’re happy with the portfolio as is?

What your strategy or philosophy is on acquisitions?

You know, as we’ve said before, you know, the first bullet point I give to our Board in terms of our strategy is hunker down, make what we have work.

We’re happy with our portfolio.

That’s not to say that we wouldn’t consider opportunities, but we’re very pleased with our portfolio.

Our — the first point of acquisition that we would ever have would be to leverage our international infrastructure, which is what I’ve said before.

Because we’re uniquely positioned there with McDonald’s being the only competitor.

And we’ve got the franchisees who in the right situation would look for an additional brand to add to their portfolio.

But we have nothing on the horizon there.

Our real challenge is to make what we have work.

The next question comes from Peter Oakes with Piper Jaffray.

Hi, actually I have a couple.

I will do them one at a time.

First, I’d like to query a little bit about KFC in the U.S.

You had a great response with the Snacker there, particularly in P3 with the double-digit comp.

But in P4, it dropped off, actually a little more than we had thought.

The product was there, and the consumer was familiar with it and knew you were still offering it.

Do you have a sense, given its demographics, that maybe gas prices are starting to play a little bit of a role with that brand?

And obviously some concern about what that presents, kind of over the short to medium term?

Well, I think, first of all, you know, we’re having good success with the Snacker.

The franchisees are very excited about it.

We have a system unified behind it.

We’re continuing to sell lots of Snackers as we go into the post-introductory stage.

Remember, you’re dealing with the $0.99 product there.

And we’re getting transaction growth back into our stores.

So, we think that the fact that we have a $0.99 product is — gives us even more insulation up against whatever economic issues that we face.

Because we’ve got a $0.99 product at a time when people are really pinching their wallets.

So, we think we’re better positioned than we certainly were positioned prior to the introduction.

We haven’t seen anything short-term which we can isolate specifically to gas prices.

But what we’re doing in Period 4 is we had one week of the Snacker, which was a very good week.

And we’ve been — we’ve had three weeks of $4 meal, which is a complete meal for $4.

And we’ve got a continuation of both high-end and low-end value as we go forward plus some more product news that’s coming.

So, we think one of the keys for us is to have — offer good low-end value, and this $0.99 sandwich and Snacker is very incremental.

And we’re excited about that.

And we are also working on ways to improve our value at the high end, as well.

So, that one-two punch, we think, will help us in any economic environment.

Okay.

And the other one, actually, is looking at the five domestic brands, each one of them, actually experienced net closings during the first quarter on the stand-alone basis.

And realizing that individual units — or non-multibranded units really aren’t a gross strategy.

But given the kind of comps that you produced pretty much across the board during the quarter, is that just really a seasonal issue?

Because coming out of the winter period some units are a little more prone to close?

Or is there something more there, under the circumstances?

Thanks.

Again, I don’t think there’s anything abnormal with the Q1 numbers.

For the full year, we’re not expecting anything very different than last year’s numbers, Peter.

The next question comes from Howard Penney with FBR.

Thanks, I have two questions, as well.

Can you briefly describe your supply chain in China?

How many suppliers you have?

It’s my understanding that there are somewhere between 40 and 50 of them.

And how are you managing those suppliers to not have this type of issue come up again?

And the second issue is on food costs around the world, your food costs seem to be going up except in China, where I think your margins for food costs were down over 150 basis points.

Why is China so different than the rest of the world?

Okay, let me take the second question first on food costs.

Food costs went up in the U.S. because of commodities by far.

And actually they went up a little bit less than the commodity impact.

They are down in China because of continued supply-chain benefit.

And they also, as we mentioned, I think on the last call, they did take pricing at the beginning of the year.

International is actually a little — YRI is actually a little bit down.

So, the only place of the three segments where we were up was in the U.S., and it was basically, you know, almost entirely due to the U.S. commodity pressure.

Other question, David can answer.

I couldn’t tell you exactly how many suppliers we have in China.

You know, we will get back to you with that and try to help you, Howard.

I can just tell you we have checks and balance system in place with all of our suppliers.

And we certainly have the checks and balances to ensure that this colorant is not in any of our products.

Our suppliers must test for and verify that the ingredients that they use are free of any coloring agents.

And after this isolated incident in China, we contacted our suppliers around the globe and we’ve recertified them to ensure that our ingredients are free of that — the coloring agent.

So, you know, I think, you know, we have the checks and balances that you would expect from any leading company to ensure that our products are safe.

The next question comes from Jeffery Bernstein with Lehman Brothers.

Yes, good morning.

Thank you.

Two unrelated questions, first just an update on multibranding in the U.S.

While you guys do provide units in the release, I was just wondering if we can get little bit more color as we have in the past on more of the sales margins and returns as multibranding takes on a larger role?

And second and separately, on the chicken category, specifically KFC U.S.-related, obviously a lot of your varied menu competitors are pushing chicken products.

Just wondering about your plans for the rest of the year to drive results against that competition?

Sure, it’s Dave Deno and as part of my job, David has asked me to lead the multibranding effort here at Yum!.

And we continue to see the sales gains that we have seen in the past.

Our flowthrough and profits continue to get better and better and better as we get used to operating them.

And I think if you go back to our Web site from the December meeting, you will see the results that we had laid out.

We really don’t have much of a change in — versus those results.

As Rick mentioned in his statement and David mentioned in their statement, we’re very confident about the Taco Bell/Long John Silver’s combinations.

We continue to test the Long John Silver’s and A&W combinations.

And our Pizza Hut WingStreet program is moving along quite nicely.

So, that’s where we stand on the operating measures.

And I think that the other thing that we’re doing — that we feel that we’re making more — driving more and more success is that we’re doing a better and better job integrating the kitchen.

In other words, integrating into one line as opposed to two separate lines and that helps with food-cost management.

It helps with labor-cost management.

It helps with crew deployment, the customer experience.

So, all of those things are coming together, and that helps improve our margins and continually drive our sales.

So in wrapping up, if you look to our December Web site presentation, you will see the economics that we laid out there.

And you’ll see the sales gains that we’ve seen, and you’ll see the margins that we’ve gotten.

There really isn’t much new news from that other than we continue to make progress operationally.

I think at KFC, you know, we sell chicken products.

You’re right, I mean it’s a good place to be.

What we want to do is continue to grow the business by offering up more product news.

Which you will see more in the future and also, as Dave said earlier, continuing to improve our operational focus, particularly in the area of speed.

But you will see in our marketing calendar, a continuation of the kind of product news that we’re starting to crank up now.

I’m very pleased with the KFC team and the fact that we’re building our pipeline.

And we’ve got a lot more things coming in the future that are uniquely KFC.

And that’s what we’re really focused on.

And the thing — this is Dave Deno.

And the thing that we’re doing in the back of the house, at KFC we’re doing a lot of work to enable that new-product marketing.

So, when we introduce new products we will be able to operationalize them and serve them in quite a good manner and improve existing operations.

So, that’s a big initiative at KFC this year in the U.S. and around the globe.

Thanks.

Kimberly, do we have more questions?

Not at this time, sir.

Okay.

Okay, let me wrap this up.

We had a great first quarter.

Every year has its challenges, and if you recall, last year we had $70 million of higher than planned commodity prices and still delivered 15% EPS growth.

This year given the strength of our U.S. and international business, we believe we will be able to cover our short-term China sales issue, which we’ve reviewed in detail with you today, and still deliver at least 10% EPS growth.

Hopefully, we will do even better once China bounces back.

We will keep you posted like we always do; so you’re continually updated on our progress.

Thank you very much for your time and your questions on the call.

Ladies and gentlemen, this concludes today’s conference, you may now disconnect.