百勝餐飲集團 (YUM) 2005 Q3 法說會逐字稿

At this time I would like to welcome everyone to the third quarter earnings conference call. [OPERATOR INSTRUCTIONS] Mr. Jerzyk, you may begin your conference.

Thanks.

Good morning, everyone.

Thanks for joining us on the call.

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 that if you do ask a question it will be included in both our live conference call and 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.

Information in this conference call related to projections or other forward-looking statements may be relied on subject to our Safe Harbor statement included in our earnings release this morning and may continue to be used while this call remains in the active portion of our website at www.yum.com which will be until midnight Friday, October 21, 2005.

On our call today you will hear from David Novak, Chairman and CEO, and Rick Carucci, our CFO.

Following remarks from both we will take your questions.

Just one point of note from a calendar perspective, we will -- our next press from a financial results perspective will be period 11 sales will be released on Monday, November 7, prior to the market's opening.

With that, I will turn the call over to David Novak.

Thank you, Tim, and good morning, everybody.

As you may have seen from our release earlier this morning we had a strong third quarter with EPS of $0.71, or 18% growth prior to a special item credit.

In fact, I'm pleased to report our global portfolio of brands is performing well.

Worldwide operating profit was up 10%, and worldwide system same-store sales grew by 2%.

Importantly, we continue to expand in three key areas of opportunity around the world.

First, in our high return China business we are aggressively expanding with both KFC and Pizza Hut new restaurants.

Year-over-year unit growth for the third quarter was 23%.

Second, in our high return YUM!

Restaurants International division with over 11,000 restaurants unit growth continues at a solid 4% rate as of Q3 led primarily by our nearly 600 international franchise partners.

We are opening new KFC and Pizza Hut restaurants in over 60 countries.

Finally, our third key opportunity for growth, U.S. multibrand expansion continues at a strong pace, up 17% year-over-year.

We just passed the 2900 store level in terms of number of U.S. multibrand restaurants at the end of the third quarter.

That translates to over 16% of our U.S. restaurant system.

We see further expansion of multibrand concepts across the U.S.

As you can see, we're continuing to expand our global business on a number of fronts with our portfolio of leading brands.

We see plenty of room to continue this profitable expansion.

I'm also pleased to report our U.S. same-store sales growth was a healthy 4%, lapping 4% growth a year ago.

Based on our overall third quarter results, we took up our full-year EPS estimate by $0.02, to $2.64, or 12% growth.

This will be our fourth straight year of double-digit EPS growth.

We will once again exceed our annual commitment to shareholders for at least 10% EPS growth.

Now, of course, I don't want to give you the impression that everything is just perfect in our global portfolio.

As always, we will talk about where we're working to get better performance.

But I do want to point out a very good thing about our company.

Having a global portfolio of brands, you don't have to be perfect everywhere to deliver solid results.

And in more challenging times such as some would suggest we are in now, having a portfolio is even better.

Now, let me talk a little more in detail about our global portfolio of businesses.

As we have said our number one strategy is to build dominant restaurant brands in China so let's look at our China business first.

The period 10 results show that we continue to make slow but sure improvements in sales trends since the ingredient issue we had in the second quarter.

Based on our consumer research KFC brand strength has returned to previous strong levels so we expect KFC sales will fully recover over time.

Needless to say KFC and mainland China continues to build on its QSR leadership position.

We'll be going to China next week for the annual plan review, and we will be celebrating the opening of our 1500th KFC in mainland China.

Pizza Hut in mainland China is having another exceptional year with over 35% unit growth and positive same-store sales growth.

That kind of new unit growth and same-store sales growth is almost unheard of in our industry.

With 190 casual dining restaurants, Pizza Hut's business in mainland China is even more entrenched as the number one leader in the casual dining category.

Additionally, we are beginning to expand our Pizza Hut home service concept and have 20 delivery carry-out units.

In fact, we just opened up our first franchise location for this concept in Shanghai.

Given that our China division continues to generate the highest return on incremental capital, and invested capital, we are especially pleased that we will likely exceed our full-year target of 375 new restaurant openings.

In summary, we continue to invest in China infrastructure and people capability given our strong brand positions and unparalleled opportunities.

We expect and are confident that China will grow profits at least 20% next year because of our dramatic new unit expansion in 2005.

As a result, we have built in profit growth for next year.

You can count on us to continue to aggressively execute our number one strategy to build a portfolio of dominant restaurant brands in China.

Our second key strategy is profitable international expansion outside of China with our YRI division.

So let's talk about YUM!

Restaurants International.

The business continues to generate healthy unit growth, earns high returns, and gross profits even while we make substantial investments for the long term in some mega market opportunities like India, Russia, and continental Europe.

Our franchise-only business markets continue to perform very well.

This very high return franchise business segment represents about 50% of YRI's annual profit and is generating solid unit growth and same-store sales growth.

Our company equity markets performance on the other hand have been uneven, specifically in the U.K. and South Korea, our businesses have not executed as well as we would have liked.

We are aggressively working on the issues and expect better results in 2006.

Mexico, however, has been a star performer this year among our company equity markets.

And it's helped to balance out the weaker than expected performance from South Korea and the U.K.

As you may recall Mexico was a struggling market for the past few years.

We are now back on track and we fully expect strong performance in 2006.

We expect the same thing to happen next year in our soft equity markets.

The U.K. and South Korea, because the team is addressing marketing and operating opportunities.

I was there a week or so ago and I was very impressed that we're on top of the issues and taking action.

Importantly, for YRI, new restaurant development is very much on track for the sixth straight year of over 700 new openings.

It is looking more likely we will exceed this year's planned target of 725 openings.

Given the number of countries where we operate today, our infrastructure in place, nearly 600 franchise partners, and new mega markets to develop, our confidence is high that we can keep doing this for many years to come.

Now let's talk about our U.S. portfolio where we continue to be focused on steadily improving operations and expanding with multibranding innovation.

Taco Bell in the United States continues to be one of the best and most consistent performers in QSR.

The brand is perfectly positioned in the QSR category with the ability to generate brand building ideas such as the successful crunch wrap and the innovative Big Bell value menu.

The "think outside the bun" advertising campaign continues to break through the clutter and deliver impactful retail news.

Speaking of news, Taco Bell has tested product news for 2006, and the calendar is already in the bed.

And we already have proven ideas and tests underway for our 2007 calendar.

We are ahead of the game at Taco Bell.

Everywhere I go, people are asking me about the economy, and the impact of high gasoline prices on the American consumer because retailers are obviously whining about it these days.

We have done a historical analysis and our net take-away is that well positioned brands in our category do well even in tough economic times.

When we look at our own consumer research today, Taco Bell is solidly entrenched as number one in value ratings across the fast-food, or QSR industry.

As a result, we feel the strength of the brand and unique value position enables us to overcome any consumer disposable income issues that may lay ahead.

In fact, we believe we have a competitive advantage in this environment.

Taco Bell is proving that our conclusion is correct, as you saw in our release this morning Taco Bell's same-store sales were up 6% in period 10, basically the month of September a time of record gas prices.

Taco Bell's growth in the last four years have made it our biggest business in terms of profit generation and based on internal estimates is second only to McDonald's in the United States.

We're beginning to step up unit growth at Taco Bell as unit economics are outstanding, for both company and franchise partner development.

And we are going to make it happen with our exciting newly designed bold choice Taco Bell restaurant along with KFC and Long John Silver's multibranding options.

Now, I can imagine how some of you could be skeptical about new unit growth in the U.S. and I know that the proof is in the pudding.

But remember, Taco Bell only has 5,000 traditional restaurants compared to McDonald's 13,900 in the U.S.

We're convinced we have a very significant opportunity on our hands.

Now, on to KFC in the United States.

We continue to be very pleased with KFC U.S. results.

Now with 11 straight periods of positive same-store sales growth, with this morning's latest results for period 10 at plus 6%.

As I said previously, we're doing a good job of focusing on core customer and -- our core customer and building new sales layers like the $0.99 Snacker providing value to heavy fast-food users for individual meals.

We also have the variety bucket providing value on family purchases.

We've sold over 100 million Snackers already this year and it looks to be one of the best product introductions in years.

With the success of variety bucket, next year we expect to make it a permanent menu item.

For the first time in a decade, our KFC value ratings have improved which bodes well in this tough economy.

KFC has instituted the processes and marketing discipline that have helped drive Taco Bell's performance for the last several years.

As a result, our advertising execution is being driven by strong consumer insights and our pipeline is now full.

Importantly for KFC U.S., we're beginning to make some improvement in operations.

Having said all that, believe me, we have much work to do, and consistency is our goal.

The KFC U.S. team is very focused on sustaining its results as we finalize our 2006 plans which will lap a year of much improved performance in 2005.

Now on to Pizza Hut in the U.S.

Year to date Pizza Hut same-store sales are up about 1%.

As we said last quarter, we expected third quarter results to be a little below our target, and the quarter was pretty much as advertised.

We continue to see this as a short term bump in the road.

We are confident the Pizza Hut team is executing a winning long-term strategy and our leadership team is excellent.

We have always acknowledged that the pizza category is our most competitive, yet we still expect to win more than we lose in this competitive category.

As a matter of fact, we expect momentum at Pizza Hut to show improvement in this quarter.

Right now, we're currently celebrating the 25th anniversary of our Pan pizza.

America's favorite pizza.

We're offering a tremendous value where you can -- where you only pay $0.25 for a medium pan pizza when you bay a large specialty pizza.

The promotion is off to a good start, and we are optimistic about making progress at Pizza Hut in Q4.

In the U.S., given the strength of our business in total, we expect solid same-store sales performance again in the fourth quarter.

We also expect about a 5% increase in U.S. profit from operations or before facility actions for the fourth quarter, despite incremental costs from the impact of recent hurricanes and the higher energy prices.

U.S. profits are improving like we predicted, and we think we can do even better.

We expect to go into 2006 with good momentum from our U.S. business.

Financially, we are very focused on continuing our track record of excellent financial management.

We are committed to invest new capital at the right returns.

As a result, we expect to maintain our industry leading 18% ROIC.

We also continue to build a strong balance sheet, buy back our stock with substantial amounts of cash, and pay a meaningful dividend that we just increased by 15%.

Now let me turn it over to Rick Carucci, and he'll take you through more of the details of the quarter.

Thank you, David, and good morning, everyone.

I'm going to discuss three items today.

First, a review of the third quarter.

Second, a brief review of our outlook for the fourth quarter, and third, an update of our cash flow expectations and our plans for this cash flow.

Let me begin with the Q3 review.

Prior to a special item credit we came in with EPS of $0.71 for the quarter, or 18% growth.

We are particularly pleased our performance was driven by solid operating growth.

We also had had some contribution to EPS growth from our financial strategies.

Now let's get into the Q3 details.

First on the business side, our international division has a solid quarter with 9% profit growth in local currency despite some uneven company performance as David just mentioned.

Our franchise only businesses continue to perform extremely well with double-digit sales and double-digit profit growth.

Our China division results improved from last quarter as sales have slowly improved for KFC in mainland China.

As we previously communicated, we booked $14 million in financial recovery from our major supplier.

U.S. same-store sales performance remains solid.

We should note that during the quarter we absorbed about $3 million of one-time costs related to hurricane Katrina.

U.S. facility action expense was up 13 million for the quarter versus prior year, reflecting the permanent closure of 34 underperforming KFC and Long John Silver's company restaurants.

U.S. profits were up 5% excluding the one-time hurricane costs and higher facility action expenses related to additional closures.

While this is improved performance, we're still not satisfied with this result given our sales levels, and we continue to work towards delivering a higher level of U.S. profit performance.

Let me provide some additional perspective on our Q3 facility actions.

We have been communicating for some time that we would incur some additional facility action expense this year related primarily to closures in the U.S.

You may have noticed in our release this morning that year to date U.S. facility action expenses are $35 million this year versus $5 million last year.

It's important to note that these costs are primarily noncash in nature and are long-term positive decisions.

On the financial side during Q3, three key items occurred.

First, our tax rate was lower than last year as we expected, and this benefited EPS by $0.02.

Second, we incurred $6 million of additional legal costs which were recorded in G&A expenses.

And third, refranchising had a positive $9 million impact on this quarter.

This refranchising upside helped us overcome the $6 million of unexpected legal costs and $3 million of one-time costs for Katrina.

Strategically we have been more active in refranchising within the U.S. this year. 128 stores year to date versus only 17 last year.

This is consistent with our earn the right to own philosophy and our desire to move our U.S. ownership closer to the 20% guideline we have previously communicated.

We are selling our underperforming stores because we believe our local franchisees are better suited to run these stores both operationally and financially.

So overall as I wrap up the third quarter we thought it was a good quarter with growth coming from a number of areas within our global portfolio.

Additionally, we incurred some charges for closures that will improve our business in the long term.

You will also see that we continue to generate high levels of cash which we're using primarily to buy back our shares.

Let's turn our attention to the fourth quarter.

In Q4 we expect earnings per share of $0.78.

Our EPS growth rate for Q4 is somewhat capped to lapping an unusual low tax rate last year of 24%.

So be sure to factor that in and don't get ahead of us.

You will note that in the release this morning that the fourth quarter got off to a good start with solid period 10 sales results for the U.S. portfolio of plus 3%.

We expect that growth rate to continue.

In our international and China divisions for the balance of the year, we expect sales growth to modestly improve from the period 10 sales results.

The impact of the recent double hurricanes and energy price spikes has created over $0.01 per share of head winds for Q4.

This is in the form of higher energy prices for heating our restaurants, increased Pizza Hut delivery driver fees, and lost profits from restaurants remaining closed in the Gulf Coast area.

These factors combined with increased facility actions expense versus last year makes Q4 a tight quarter but we still expect to turn in a very solid performance for the quarter and have a very good year.

Importantly, we expect to have momentum going into 2006.

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 earnings expectations change significantly, you will definitely hear from us, as you have in the past.

As noted in our release this morning we have decided to adopt FAS 123 in quarter 4 of 2005.

The impact is noted in this morning's release.

We estimate that expensing our stock options will have an annual cost of approximately $0.12 per share.

The impact of Q4 is expected to be approximately $0.04 per share.

Please note that all of our forward-looking discussions today in our release this morning do not include the impact of expensing options.

Let me repeat.

They do not include the impact of expensing options.

My last topic today is a brief review of our cash flow generation.

During 2005 we expect a record of nearly $1.3 billion in net cash provided by operating activities.

We are likely to see about 650 million in capital spending for the year versus our previous estimate of 720 million.

This reflects a tighter forecast based on our year to date spending.

So free cash flow will be substantial again this year, over $600 million, a new record.

We'll also generate an additional $100 million from refranchising, at least 170 million in employee stock option proceeds, and about $80 million from sales of surplus property and equipment and other items.

When you add that all up, that's approaching $1 billion in available cash.

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

For 2005, you should expect at least 800 million devoted to our share repurchases versus our prior communication of at least 600 million.

We already have purchased 678 million year to date, a record amount for YUM!.

Our diluted share count has decreased by 2% to 298 million shares.

This is the lowest level since Q4 of 2000.

In addition, we now pay shareholders a meaningful quarterly dividend which was recently increased by 15%.

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

In addition, our balance sheet continues to strengthen as our key financial ratios continue to improve.

So in summary, we expect 2005 to be another successful financial year for our shareholders, because we expect to deliver 2005 EPS of $2.64 or 12% growth versus last year.

This is the fourth consecutive year of double-digit EPS growth.

We expect another record year of cash flow from operations and a record year of free cash flow available.

And a record amount of cash returned to shareholders.

Back to you, David.

Thanks, Rick.

As Rick just said, we had a strong third quarter and we're having another very good year.

Now let me give you a brief overview of how we're looking at next year, 2006.

Basically we're very confident we will deliver against our annual target of at least 10% EPS for the exact reasons we had success this year.

Plans are in place to continue to grow earnings in our four key areas of opportunities.

First, China expansion.

Led by the strength of 375 plus new units that we added this year we see at least 20% growth in profit next year and continued aggressive unit expansion with high returns.

Next, international expansion.

We go into another year with at least 700 new restaurant openings and the opportunity to improve performance in our major equity markets.

In the United States, we expect solid same-store sales growth of at least 2 to 3% because, number one, we offer and market tremendous value.

Number two, we have a proven ability to generate product news, and our marketing calendars are strong, and number three, our ops continue to improve and we're getting more and more consistent.

Finally, in the U.S., we will also continue to -- continue multibrand expansion at a solid rate, strengthening the competitive position of our restaurants.

From a profit picture perspective for the U.S. business, we are optimistic that commodities will be slightly again in 2006 after two years of record prices.

This should help us make some progress in margin improvement in 2006 in addition to the daily intensity we bring to driving profitability at the store level.

Net-net, we are optimistic about 2006.

Now, one thing you can't see, and I don't have time to talk about, is all the progress we're making on our longer term growth initiatives around the world.

We're going to tell you more about these growth initiatives at our New York investor conference coming up December 6, and we're putting together I think a very interesting and great dialogue on our business for you.

With that I'll turn it back to Tim.

Thanks, David.

Just wanted to give you guys -- everyone a quick reminder about that conference.

Our annual conference for investors and analysts will take place Tuesday, December 6, in New York, from 8:00 a.m. to 1:00 p.m. eastern time.

On-line registration is required before 5:00 p.m.

Friday, December 2.

So please go to www.yum.com and register.

Click on register now beside this event under upcoming analyst and investor events.

If you have any questions please feel free to call us at Investor Relations at YUM!, 888-298-6986.

With that let's turn the call back so we can open up for Q&A.

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

Hi, guys.

I wanted to ask a question about the pizza category and Pizza Hut.

Last year, you guys were grabbing share big time, particularly earlier in '04, and this year has been obviously a different story.

The consumer has been weakening lately, and consumer confidence coming -- or at least consumer confidence has been weakening lately.

And I remember that was an old metric we used to talk about with the pizza category, and I guess my question is, if the pizza category growth has been hanging in there pretty well, your competition has been pretty strong, I'm wondering how you're thinking about what will give here.

Will the pizza category potentially slow down and take you guys with it?

Will you have to maybe focus more on value, and if it's not really value that's driving the category, and it's other things, how can you participate in this better category growth?

Well, first of all, the pizza category itself has been flat for the last couple of years.

And we grew share last year, as you pointed out, David, and this year we're actually growing share in the category.

Unfortunately, Dominos has outperformed us recently, so we have to give them their proper kudos.

Consumer confidence has -- we think is -- has pretty high correlation with how the category does.

So that is an issue.

We've talked about that in the past.

We think the way how we're going to win is to continue to execute our strategy of providing pizza innovation with new and exciting pizza news, which I think we have a pretty good track record of, and also offering good value, like, for example, we right now have this Pan pizza promotion that I was talking about where you buy a large specialty pizza you get a medium for $0.25.

I think that we think that we'll fare well competitively going forward with the combination of those two aspects.

I think as the category leader it's up to us to drive the news in the category and stimulate the category growth.

That's the challenge that we put forward to the Pizza Hut U.S. team, and we think they're up to the challenge.

Okay.

Thank you.

Thanks, David.

Next question, please.

Your next question comes from Jeffrey Bernstein with Lehman Brothers.

Thank you very much.

Question on the broader quick service category and your thoughts on acquisition.

There's been ongoing talk of late surrounding the sales, several, I guess the larger quick service operators, categories that you don't necessarily currently compete, specifically coffee and breakfast, as well as kind of a national varied menu chain, I was just wondering if you could talk about the current status of your portfolio and your appetite for potential future acquisitions either in those categories or others?

Thanks.

Well, I think, right now, let's face it, we have five great brands with lots of runway.

We're the category leaders in four of the five categories that we compete, Mexican food, pizza, chicken, fish, so our plate is full, and frankly I'm not going to comment on any rumors because there's lots of speculation out there.

All I can tell you is that we have lots of growth potential within our current portfolio.

Outside of the U.S. there are only three true international brands.

KFC, Pizza Hut, McDonald's.

But if you compare our two brands with theirs, we operate I think, in about almost 8,000 -- 7900 KFCs, 4700 Pizza Huts are outside the U.S., when you include both YRI and China combined, compared to nearly 18,000 McDonald's outside the U.S.

So we have plenty of room for development and growth in the future with our existing brands.

We also believe that we have the opportunity, while it's more difficult in a very competitive category, to turn around our U.S. brands and get even more consistent growth and profit growth that Rick was talking to you about.

So the other thing that I think that is sort of the bird in the hand that we have is Taco Bell.

I talked about Taco Bell's improving unit economics the last four years.

We think that we are on the verge of U.S. development of new units with Taco Bell either through Taco Bell stand-alone units and/or Taco Bell/KFCs and/or Taco Bell/Long-John Silver's.

So we think we have a lot of options to really take that brand forward in the U.S., and I was talking to our team a couple of weeks ago about what would you acquire.

I think if you looked at -- if you were in the -- if you had an international business and you had our infrastructure what would be -- what would you want to have, if could you have it.

Well, we'd love to have Starbucks, but I don't think we're going to get that from Howard Schultz too easily, okay.

Probably can't afford that one.

The other one that I think everybody would want to have internationally looking in would be Taco Bell.

And Taco Bell hasn't been developed outside of the United States, and Taco Bell is a totally different concept than it was four years ago and when we talk to our franchisees around the world they are clamoring to develop Taco Bell.

That's clearly one of the irons in the fire that we have going down the road.

Obviously we're not in every category.

We're not in breakfast, we're not in burgers in a big way.

We're not in coffee or the beverage business.

Those are opportunities that we can look at but anything that we would look at we would look at in terms of something that would accelerate our growth rate and also we'd be convinced that our return on invested capital, which is 18%, would be something that we would be able to be in that range on.

So we're pretty proud of our financial track record and we're not going to acquire anything unless we think we can really take something which we think is great and take it to the next level.

Thanks, Jeff.

Next question, please.

Your next question comes from Rachael Rothman with Merrill Lynch.

Hi, guys.

Good morning.

Could you talk a little bit about your China division.

I understand it's not just specifically China but maybe some of the sales trends that you've seen there, and is -- the sales trends that you're experiencing, are they still being impacted by Sudan one?

And I know it's the whole division, so I'm sorry if I'm generalizing.

That's all right.

I think we're making slow and steady improvement in our sales since the ingredient issue that we had early second quarter.

We're very excited with the fact that we are continuing to open up almost a restaurant a day with very good economics and in particular, when we go outside in the new cities those stores are really performing well as we go ahead.

I think that initially when we had the ingredient issue, the consumer ratings on the KFC brand and the category dropped.

What we've seen is that KFC consumer ratings have pumped back up, and so they're back basically to where they were before the incident.

So we think the brand strength is back and that we think that we're going to recover over time and we think the team is doing -- has done and is doing all the right things to get us back there.

It's been a little slower than obviously all of us would like, but the great news is that we're getting back and we still opened up the number of units that we did.

We've got those units built into our profit base for next year.

So we're very bullish on China in every dimension.

And that's just talking about KFC.

When you look at Pizza Hut, Pizza Hut just continues to be a star for us, we're opening up 35% more units and getting same-store sales growth, we're expanding home service delivery, so we're pretty excited about the big two that we have, and the retains -- the returns, I'm sorry, remain well above our CapEx hurdle.

Have you guys noticed any change in the competitive environment there?

Well, McDonald's has opened up more restaurants this year but we have not seen that really affect our performance.

We don't think that's a contributing factor because there's a lot of people there and there's a lot of places where you can go eat, and we're mindful of what McDonald's is doing but we're much more mindful of what our consumers are telling us and how we position our brands as powerfully as we can to be successful in the marketplace.

Perfect.

I appreciate it.

Thank you.

Thanks, Rachel.

Next question, please.

Your next question comes from Larry Miller with Prudential.

Hi, guys.

If I could just first follow up on that particular point that you guys just answered, David you said that the consumer ratings are back to the pre Sudan one levels but yet sales are flat with the prior couple of periods.

Why do you think maybe it's not a longer lasting change in the Chinese consumer behavior?

What makes you think it's not a permanent change?

I think that the China -- let me -- could you repeat that question?

I just want to make sure I get it right.

I guess what I was asking you is, you said the consumer ratings are back to the levels that it was before the food coloring was in there, but yet sales really -- maybe they're lagging, and that might be the answer with that that I'm looking for, but why is it that you don't think it's more of a longer lasting or permanent change in consumer behavior with the Chinese customer?

Well, I think the -- when I look at what's going on right now with KFC is, we have a big business at KFC.

We have volumes that are high at each one of our -- at our restaurants.

And so as we go forward there's going to be more and more of a premium on us having very consistent and outstanding execution in marketing, along with the operational excellence that we have there.

And I think frankly the last promotion that we just went through on a short-term basis, which was the chicken fried chicken promotion, basically was not the kind of products assessed that we were really looking for.

So just like in the U.S. when we miss it can hurt you a bit.

I think in this case we didn't have as good of product news as we would really have liked.

Going forward, we hope we'll do better at that.

Okay.

Thanks.

And my question was also on multibranding.

You guys have been at it for a few years now.

Can you talk about the trend in returns that you're seeing?

I know you've got a couple of new brands out there, but--.

I'll talk in general about profit performance versus specific returns.

But if you look at the time combination that we've been in the longest, is actually where we're having the most financial success, that's in the Taco Bell/KFC combination.

If you look at the other combinations that we've done, first of all, they're primarily for somewhat different purposes.

As David mentioned on the Taco Bell side we are using multibranding to help us get into areas that we're not into today.

So we're doing that both with Taco Bell/KFC, as well as with Taco Bell/Long John Silver's in the northeast.

And the Taco Bell/Long John Silver's results so far have been pretty good as well.

If you look at the KFC combinations, the KFC and A&W combination, and the KFC/Long John's combination there's more opportunities for us to reinvest on our assets rather than getting into new points of distribution.

Our results there have been improved this year versus prior years, so we've improved our margins.

Our franchisees have always had pretty good success in those concepts and those margins.

So our margins are improved in those concepts, not yet where we want them to be.

When we get them up a little further we'll probably expand more on the Company side.

On balance our returns are above the hurdle requirement that we have, and going forward you're going to see more KFCs, more Taco Bell'Long John Silver's, expansion of KAWs and also we're expanding Pizza Hut with the WingStreet combinations and continuing to test Pizza Hut, Italian bistros.

So we think we've got great consumer propositions that are going to just get better and better as we get better and better at execution.

Thank you guys.

Thanks, Larry.

Next question, please.

Your next question comes from John Glass with CIBC.

Thanks.

Good morning.

Could you talk about how much you think cannibalization has impacted the comps in China, particularly as you've accelerated growth this year?

Yes, that's an area we always look at.

Given the amount of units that we add to our base.

This year, as David mentioned, we're going to be adding over 375 units to the China division, which is a large percentage of our base.

The same has been true if you go back, John, over the last several years.

So we always look at that figure.

A couple of things.

First of all, as we've gone into new cities we continue to have success there.

When you look at expansion within cities, one of the things we look at is what is the overall sales transfer between units and how is that growing, which really occurred this year is there was no real change in areas where we added new units based on the red dye issue versus existing units so we really saw no impact -- no extra impact from adding new units.

It was really just the red dye impact had the same impact on existing units as well as new units.

The good news for us is, as David mentioned, our returns on capital are high enough that even at those lower sales levels, we are able to get a great return on our investment.

So we haven't really seen any changes in cannibalization but it is something you always have to keep looking at when you're adding 375 plus units per year.

We obviously have been -- we're impacted earlier with the Sudan red.

We think that will mitigate over time, and we will always in this company, we're going to always go for the magic of the and.

We want new unit growth and same-store sales growth, but having said that, I think the big -- the most important measure when you look at a developing country, an emerging country like China, is systemwide sales growth, not same-store sales growth, because we are adding a lot of restaurants, we're adding them profitably, and the units that we have in the ground are doing extremely well.

The existing business, even though our sales may be a little down, the overall unit economics that we have right now with our existing KFC units are outstanding.

So we've got a great financial return for our shareholders and the real key measure is systems sales growth and obviously though having said all that, I'm going to China next week, and we'll be talking about how we get our same-store sales up.

Just a quick follow-up, how much are you expecting to collect from the supplier in the fourth quarter?

It is an additional amount that is meaningful and that's all we can tell you.

It hasn't -- it's not even gone to arbitration yet.

is that included in the fourth quarter guidance or not?

Yes.

So there is a number you've got in mind.

Yes.

Okay.

Just one other point, John, on KFC -- on China and KFC there.

I think this is important for everyone because we're much, much more familiar and closer to the KFC U.S. business.

If you think about KFC the U.S. has 900,000 average unit volumes, check average is over $7, you're talking about annual transactions per unit of over 100,000.

In China KFC is averaging 1.2 million average unit volumes with a check average of about $3.

That's transactions of 400,000.

You're talking about transactions in China that are triple the U.S.

So why are we cannibalizing units?

That's why we're cannibalizing units, because even as big as they are, with 2 to 300 seats and multiple stories they do get maxed out with transactions.

And four years ago, I remember we were going through looking at development, we actually thought we were starting -- remember Rick, we thought we were starting to see some potential cannibalization in China and we said, no, that can't be.

We put the pedal to the metal and look at the business that we've built.

That's exactly the same way that we feel right now.

If we can keep opening up restaurants with the kind of returns that we have and have the kind of base business that Tim was talking about we're going to do that for our shareholders until the cows come home.

Thank you.

Thanks, John.

Next question, please.

Your next question comes from Mark Kalinowski with Buckingham.

I just have a question on the KFC, Kentucky Fried Chicken name, it looks like YUM! is easing back into using the full name as opposed to the abbreviation to a little bit of an extent here.

I have no idea whether this is an urban legend or not although obviously I have reason enough to ask about it.

I think the state of Kentucky may have trademarked the word Kentucky for business reasons, and that may have been a factor leading to the switch to the KFC name, and just wondering if what I've read has any basis in reality at all and if does, if that has any implications for that particular brand and its positioning going forward?

No, that's -- I don't know if that's urban legend or stupid legend, but it's not -- it's totally legend.

Okay.

Let me tell you what we're doing.

The reason why we're doing -- emphasizing Kentucky Fried Chicken is the one big trend that's going on in the world today with specialty customers is they like things that are authentic and genuine.

And when we bring up and talk about Kentucky Fried Chicken it brings back the authenticity, and people want us.

We actually did an Internet survey.

People want us to call our chicken Kentucky Fried Chicken.

I think over 80% of the people said call it Kentucky Fried Chicken.

So we think that's the way to really emphasize our strength with our core users, and in particular the high-end offers that we're doing in things like the variety bucket and just our bucket sales.

So we think that we may have just been off target, okay, by not emphasizing that in the past.

The team right now really believes Kentucky Fried Chicken as a way to describe our product, it is what our historical equity is, is a powerful way to be more authentic, more genuine and really bring forward the fact that we're Chicken Capitol U.S.A.

I might ask a quick follow-up.

When you look at dollar stores, apparently they're struggling.

They typically have a lower income consumer base.

Fast-food chicken chains tend to have somewhat of a similar base yet KFC is generating outstanding results.

What are you doing at KFC to maybe entice the lower income consumers that maybe some other retailers are not doing?

I think that for us we always ask ourselves what consumer perceptions habits or belief you have to change or reinforce to grow the business.

One of the things that we've heard consistently is that people would like to have better value at KFC on both the low end and the high end.

So the low end of the menu we really -- we made a bold move and one that was very provocative in terms of taking our brand forward when we for the first time in the history of our brand we offered a quality $0.99 product, which we called the Snacker, which has been very incremental because it basically is a snack.

Believe it or not, the transaction -- the average guest check for our Snacker product is identical to the base guest check.

So there's been no trade-down and we've brought in lots of incremental customers with the Snacker.

The other thing we're doing is we're recognizing people are looking for value on the high end as well.

So we're advertising our high end product simultaneously, like our buckets, simultaneously with the Snacker, an offering them at good value, too, either a $9.99 price point, recently we had a free cake promotion.

But all this is geared towards trying to make a product that people actually like a lot, they'd like to eat us more often but they would like to us make our products more affordable.

So I think that's why I think -- I think we've sold 100 million Snackers this year, and variety bucket next year for example is going to be a permanent menu item because it's been so successful and gives people more choice.

So to me, we did analyze -- we looked back at the category.

I was talking to our consumer insights people and in particular Taco Bell, Tom Wagner did a very exhaustive analysis of what happens to fast-food brands in the economy.

And I think the brands -- there's always winners and losers in those kind of environments.

The winners are the brands that are well positioned that have good advertising campaigns going for them, that have good product news going for them, have good value, and their operations are improving.

The losers are the ones that get off track.

And I would challenge you to look around at what's going on in our category today and compare the brands and how they're doing and compare their previous -- compare it to previous marketing activity that they used to have, previous new products that they had.

The people that are beating year ago, which is a big part of our mentality, are the ones that lose.

This is not a new story from me.

I've been telling you guys this for four or five years.

That when we -- typically when we get off track it's self-inflicted wounds.

So that's how we feel.

That's why we don't have weather reports, we don't have gas reports at YUM!, and our job is to drive the business.

I appreciate your comments.

Thanks, Mark.

Next question, please.

Your next question comes from Steven Kron with Goldman Sachs.

Two quick ones if I might.

The first is just to follow up on the China recovery amounts, and just to make sure that I understand.

How is this amount being calculated, and just to make sure, is it flowing through the revenue line and might we see a first quarter '06 recovery if the business is still not back to normal?

In other words is there a tail to this that you can continue to get recoveries?

Well, first of all, I'll answer the where is it.

It is in the China division P&L in the "other income" line.

That's where it resides, you'll see it there.

That's also where we are reporting joint venture income.

So that's -- there's those two items essentially that are in that line item.

As Tim mentioned there will be a meaningful number in Q4 which is included in our forecast.

Anything beyond 2006 would be a modest number.

Anything beyond 2006?

Anything in 2005, anything in 2006 and beyond would be a modest number.

The second question is on the U.K. business.

Dave, I know you had some brief comments on it but I was just wondering if you could just provide a little bit more color in that region.

Are you facing something there that's kind of more out of your control than you had originally thought?

Are you changing the way you kind of look at the U.K. region?

Given that with unit growth of 7% and system sales of negative 1 would imply a negative 8% comp for the period.

We had -- that's true, your math is pretty good there.

And we -- when we look at our Pizza Hut and KFC brands, we think that two things are happening.

One is that we really -- I was with the team.

We haven't really positioned our brands as impactfully as we should from a marketing and consumer perspective, particularly with our advertising campaigns.

We've had kind of like the advertising that people think is funny but it doesn't sell a lot of product so I think we've not done well on the advertising/positioning front.

Value-wise, we've done a lot of good things but we haven't really gotten a lot of credit for it because we've had poor communications.

So I think we have a big advertising positioning challenge there that we need to take care of as we go forward.

The other thing is, is that we are looking at how to improve the overall value proposition and do it in a way that protects our guest check and our profitability, which is something that we're pretty good at doing once we get our eyes wrapped around it.

Have you made any advertising changes yet?

We're in the midst of it right now.

The team is really looking at it.

In fact, one of the things we do is we share best practices.

We have the U.K. team meeting with our Taco Bell team and sharing best practices.

I think they're coming in next week.

We want -- what we have with Taco Bell and I think now KFC and Pizza Hut, we have pretty good marketing processes and discipline.

We're trying to do a great job of transferring them around the world.

I think that as our businesses get bigger, whether it's the U.K., China, you pick the companies -- countries, we've got to get better and better and more consistent at our overall execution from both the marketing and a operations standpoint, and that's what we're pushing for.

That's not to say that we've got a huge problem.

It just means that's just the reality that we go for every day in terms of getting better at executing our business.

Steve, I'd add two things.

First of all, I think that the economic environment was probably a little weaker than what we thought it would be.

It was a weak retail environment, pretty much all year, and after the terrorist activity it got even weaker.

So again it's not an excuse, we could have done some things better, but the reality is the environment is weaker than what we would have anticipated.

And then longer term to your question, I don't think there's a fundamental problem with the market.

We're very confident about that market long term we have excellent management teams on both brands.

Our history there is excellent.

We've grown operating profit over a five-year period above 20% per year.

We've got a 7% system restaurant.

If you look at over the last four to five years we've been averaging about 90 to 100 new units per year so we still feel very good about the long-term market.

Rick, have you seen the sequential improvement in sales since the London terrorist bombing?

Not really.

Things have really not gotten better since that point in time.

I would have personally expected a little faster recovery but it really has not gotten better.

Great.

Thank you.

I think the big message here is, and I hope that we're listening in the U.K., it's consistent, we've had self-inflicted wounds in many respects and we've got to get better there.

Okay.

Thanks a lot.

Thanks, Steven.

Next question, please.

Your next question comes from Joe Buckley with Bear Stearns.

Thank you.

I have a couple of questions if I can.

David, for the U.S. for 2006, I think you said you're guiding to blended same-store sales growth of at least 2 to 3%, and if I'm not mistaken that's a little bit better than your typical long-term guidance of 1 to 2.

Just curious that you're feeling that confident in this environment, if you'd just fill that out a little bit for us.

Yes, I think we do feel confident.

We think our brands are well positioned from a value perspective.

We think that we have very good pipelines at each of our brands.

Taco Bell and KFC have a lot of momentum going for them as we move into the next year.

Pizza Hut is our toughest -- is in our toughest category but I think we've got a great team doing a lot of things, and, Joe, as you know, we've put a big focus on improving our operations at each one of our restaurants.

That's fundamental to our success and we see that steadily improving.

The other thing that gives us a little confidence is that, I think we were up 4 last year and we're going to be up 4 this year.

Why do we want to tell everybody we can only do 1 or 2?

Then question on China.

Do you think gasoline prices have had impact on your business there and what's sort of the government doing in terms of controlling gasoline prices?

Is there any risk of that changing which might put more impact on -- more pressure on the consumer?

I think we'd have to -- you know what, Joe, I'll try to get beater handle on that next week.

I couldn't be the expert on that right now.

Joe, this is Tim Jerzyk.

The last time we talked to the China team, which is very recently, the government had not moved the price on gasoline.

And as a perspective there, I mean, most of the people that are coming to our restaurants are not driving their cars, they're either walking, getting out of the subway, off a bus or off their bike and they're coming into our stores.

Just to put it in a little perspective as far as a cost perspective, our distribution business, the annual cost for fuel is like 3, $4 million.

So from even from a cost perspective it's not that big of a deal.

Okay.

One more question if I can, just to go back to the question about kind of long-term acquisition strategies.

Reading between the lines, it sounds like if you have interest it's more likely to be something international than domestic, and then just your comment on Starbucks, of course, given the public news on Duncan brands makes me wonder about that brand and if it could fit from a strategic perspective?

First of all, let me talk about what we've done, because that's a better indication of what we'll probably do in the future.

We did a deal in Russia, okay, to get us a start of 100 KFCs in Russia.

It took us ten years to get 100 KFCs in India -- or 100 Pizza Huts in India and ten years almost to get 100 KFCs in China.

So that acquisition made sense because it really leveraged our existing brands and gets us into a country that has, if you count the CIS in Russia, it's about 300 million people.

So that's -- we like those kinds of things.

We want to acquire for international expansion, that's our first priority, anyone could sit back and look at Dunkin' Donuts and say that it could have a strategic fit for our company, because obviously we're not in the breakfast business and we're not in the coffee business.

I'm only saying that we love our existing business, okay, and that for us to get interested in Dunkin' Donuts we'd have to know a [Expletive] of a lot more about it than we do today, okay, and like any good company, we'll obviously look at those kinds of opportunities because they don't come along that often, but I'm not -- I'm not signing up for anything that's going to not accelerate our growth rate, allow us to take our return on invested capital and keep it in great ranges, but we'd got to -- we'd be irresponsible if we didn't look at things like that, because anybody could look at our business and say, we don't have one of those.

But that doesn't mean we're going to acquire it, and nobody should be stupid enough to print that.

Okay?

Because we've got a lot more to learn before we'd ever go down that path.

Okay.

Thank you.

Thanks, Joe.

Next question, please.

Your next question comes from John Ivankoe with JP Morgan.

Hi, Tim, David, if you could talk about the investments that you're making in a variety of markets like continental Europe, India, I know you just did obviously the JV in Russia, just in terms of what that P&L impact is this year and whether you think it will be more or less negative or what, I guess, the swing would be in '06 and what kind of -- where you think we are in the hockey stick of profitability in some of the markets other than the big three?

Thanks.

The markets that we look at is, within our YRI division is the strategic growth initiative.

So that includes India, continental Europe, we've added Russia to the list and Brazil make up the bulk of that business.

We sort of look at that within our international division as their equivalent of R&D spending.

Last year we lost about $30 million if you added those markets together.

This year we expect to be in the 20, $25 million loss range but obviously the big impact of what could these markets become.

We don't have the handle on that, and we don't yet have a number for what we expect in 2006.

However, what we would say is where we're making the most progress.

I think a couple of places.

First of all, India, we're very excited about over 100 units now in India.

We're at break even in India, about break-even this year so we feel good about that, and now we've added KFC equity in India, so we plan on opening some company-owned restaurants in India in the latter part of this year to take advantage of mall development as well as the power of our brands, with a billion market consumer base, which we like.

Within Europe, the market that we're most excited about is France.

We've had very good success in France regarding our sales levels.

You need great sales levels in western Europe because of the high cost structures.

We're getting that and above in France.

And France also is approaching break even as well which we feel very excited about.

So we feel very good about our progress there.

I don't yet now have numbers I could share in terms of what we're expecting in future years.

We'll probably share a little bit more about that in December.

John, I think the one additional perspective that I would add, you kind of got to go back when you think about some of these investments that we're making and look at the U.K.

I think in the early '80s, mid '80s, Pepsi Co. was actually thinking of pulling out of the U.K.

Because we weren't doing that well, and -- but we stayed with it and look at the business that we have today in the U.K.

I think it's going to take us awhile to really build these businesses and I think just staying after it, step by step, getting your unit economics to the point where you're break even, then doing better than that.

Like, for example, in continental Europe we've been developing in Holland, Germany, and France.

And recently we just launched an advertising test in Holland, and we saw significant -- because we got enough scale to where we could see the impact of television.

We saw significant improvement in terms of our sales that gets us closer and closer to where we need to be with an investable proposition when all we had was basically a four or five-week advertising flight at moderate rates, nothing like you'd see here in the United States behind any one of our brands.

So I think our goal is to just keep working at this, making sure our consumer propositions are right but I'm convinced that we will have businesses in all these countries that we're mentioning some day.

I'm not saying they're going to be as big as McDonald's, but McDonald's has 1,000 restaurants in Germany, 1,000 in France, 400 in Holland.

Let's say we get a quarter of that.

That's a lot of business that we can do, whether franchise or equity.

But I'm convinced that over time just like we did in the U.K. we're going to build businesses there and we're going to have to make investments and what we're trying to do is grow our base business at least 10% a year like we're talking about in terms of EPS but make the kind of investments and have the long term stick [tuitiveness] to build those businesses over the long term.

Thanks very much.

Thanks, next question, please.

Your next question comes from Martha Shelton with Friedman Billings & Ramsey.

Hi there.

This is Martha Shelton on behalf of Howard Penney.

I'm just trying to get a feel for regional sales, specifically in the U.S., just kind of trying to get an idea of how sales trends have been or sales have been trending on the West Coast, in the Midwest and on the East Coast and in the South?

Sure.

We actually, based on all the questions we've been getting from various folks on that, we asked all of our brands, had them look in detail, we have seen across all of our three big brands in the U.S. we are not seeing any specific positive or negative trends out of the ordinary.

What you're seeing the overall brand there's nothing specific by regional territory.

Copy that.

Thank you.

Thanks, Martha.

Next question, please.

Your next question comes from Mark Wiltamuth with Morgan Stanley.

I wanted to dig in a little bit on the U.S. margins.

Clearly it looks like you had some improvement in food costs.

If you could just give us a little more detail on that, and then also what was behind the increase in occupancy and other expenses?

Yes, sure, Mark.

On the food costs, we're to the point now as we talked about earlier where commodity inflation is basically a non factor.

There was actually about a million or so of deflation in our commodities this quarter, which is the best quarter in probably two years.

On the occupancy side, we had some inflation in utilities which flows to that account.

Then also the Katrina impact, the $3 million of costs hit occupancy in the U.S.

Basically asset write-offs of the stores that were impacted by the severe damage.

Okay.

So the facility actions and all those other things you've enumerated are not in the restaurant operating margin line?

Correct.

Also, I wanted to ask a little bit more about your thoughts on expanding the store base a little bit, especially on the multibranding.

In the past you've had this fish first strategy and sounded like you had kind of put the Taco Bell multibranding expansion a little on hold because you wanted to see what the potential was from Long John Silver multibrands.

Does it sound like -- are you really moving now more towards more of a Taco Bell multibrand expansion and maybe the fish first has fallen by the wayside?

Did you want to answer that, Rick?

I can answer it.

Go ahead.

I think, first of all, we're evolving, okay, and learning and testing all the time here.

So we're continuing to execute up against the Long John Silver fish first executions, and additionally, we've seen Taco Bell evolve big time.

Just look at the progress we've made in sales and profits the last four years, and there's no question that if you have Taco Bell with its average unit volume of $1.1 million leading the way on our multibranding combinations, you've got -- you've got a bigger opportunity for higher return on invested capital.

Okay, and you also have the best consumer proposition which usually leads to a higher return on invested capital.

So I think that we're still testing a lot of Taco Bell -- I mean, Long John Silver opportunities.

We're testing Taco Bell with Long John Silver and that's our number one combination right now along with KFC/Taco Bell.

So we've tested Long John Silver/A&Ws together.

The replacements are doing real well.

And so we think that that's one way how that system could evolve over time but we'll update everybody more on where we're going with multibranding at the conference in New York but we are continuing to learn, evolve, test, and -- but the thing that I think when we look at U.S. development in summary, the thing that we have to be most excited about, okay, is Taco Bell's tremendous improvement and the fact that it can be a lead horse in terms of future new unit development in the U.S.

So when you're talking about returning to expansion of the U.S. unit base it's more with multibrands, more so than the stand-alone brand?

I think with Taco Bell our stand-alone unit economics are great.

We've got 1.1 average unit volumes with very, very good margins, and we also have multibranding.

So I would say it's a combination of both of those as we go forward.

I'm a bigger believer in multibranding, okay, because of its overall consumer appeal, in that you get more choice but I can't argue with the fact that the most recent Taco Bells that we've opened up in new territories are doing extremely well, and frankly they're easier to run.

So I think we're looking at a combination of both Taco Bell and multibranding, Taco Bell multibranding combinations as an opportunity for us.

Okay.

Thank you.

Thanks, Mark.

Next question, please.

Your next question comes from Peter Oakes with Piper Jaffray.

Hi.

I actually have a couple of questions if I may.

First is China.

You're now seven straight periods of meaningful comp declines, and we've talked about the Sudan one and some of the macro pressures out there, but given the struggles that have persisted, would it be reasonable to expect comps are going to be down another seven periods or you think you're going to be able to right the ship quicker than that?

I wish I had a crystal ball, Peter.

Clearly what we -- we are making progress.

We're still not back to where we'd like to be.

What I sort of believe, and what we've said is that we expect to have modest improvement for the balance of this year.

And I think as you look towards next year, Peter, the first quarter was phenomenal last year, okay, so we might be a little softer in the first quarter, then we'll have the benefit of overlapping some of the poorer performance.

So if you want to go seven periods, your math would be worse than mine.

Okay.

The reason I'm asking is, I'm curious how, if at all, has the sales pressure impacted the way you're thinking about the ROIs for China from where you were say in 2004 on a go forward basis.

We're still extremely bullish on the China returns.

Obviously we spent a lot of time looking at that within our company, seeing where we're getting the results and where we're not.

We always continue to adjust.

What we feel really great about and continue to feel great about in China is just going to the number of cities that we've been going to.

We're now in over 280 cities at KFC.

We continue to add cities.

Our results in these smaller cities, some of which aren't that small.

Some of them there's a million people.

But our results continue to be outstanding from a return perspective.

So we feel very good about the business and the return.

I think this is a -- we've provided some of this information in the past.

Average unit volumes for KFC in China are 1.2 million.

We said the cash investment is 450 to $500,000.

Comps are down mid-single-digit kind of range.

Take that off the 1.2 million and ask yourself if that's still a great return.

I think the answer you're going to get is it's great return.

The question was really just the trend.

But I hear what you're suggesting here.

On the Company-operated margin side, if we look at the regions, actually China's year-over-year margins improved quite impressively sequentially, notwithstanding the comps, but the payroll and occupancy lines for both U.S. and YRI actually struggled to get fixed cost leverage.

You did mention Katrina to some degree and also utilities.

Is there anything else there that's putting some pressure on your fixed cost leverage for those two geographies?

For YRI and--?

The U.S.

The U.S.

Yes.

Yes, no, it's basically in occupancy, it's utilities, and the Katrina wrote-offs were in the occupancy line.

Regarding international, Peter, I don't think there's anything structural there.

I think what's just occurring there as David mentioned, is we're struggling in two of our big equity businesses, the U.K. and Korea.

That's what's driving the margin problems.

Okay.

Then lastly on the multibrands, if we look back over the last two years you've added about 900 units.

I know we talked previously there about Long John's but the preponderance of the multibrand editions have been the Pizza Hut/WingStreet combination.

That's been heavily skewed towards the company units.

Are we at a point where we see franchisees starting to step up behind the Company, or given the real estate concentration of a little more skewed -- where the model makes more sense for company, is that something that franchisees just really aren't going to be participating with of much nature?

I think next year you'll see that step up.

Okay.

Good.

Thank you.

Thanks, Peter.

Next question.

Your next question is a follow-up question from Larry Miller with Prudential.

Thanks, guys.

I was just wondering if you can comment on the traffic and check mix in the quarter particularly in the U.S. and I'm hearing some other restaurant companies out there talk about a lower incidence of beverage sales.

Are you seeing that?

And then finally, I guess the only energy related questions we didn't hit was how it might be affecting the European consumer, if you can comment briefly on that.

Okay.

On the U.S., you wanted transactions and check?

Yes, if you would.

Taco Bell was up 8.

Transactions were 6 of that.

Pizza Hut was down 7, and transactions up 4 in check.

KFC was up 6 and it was all transactions.

Was there a mix in -- are you guys seeing a mix in beverage sales at all?

Lower incidences?

Not that I'm aware of.

I think KFC may be down a little bit but not--.

I think Taco Bell is up a little bit.

All right.

As far as Europe, any impact on the energy prices there?

In terms of--.

None that I can really add a whole lot of color to.

It's just a lot more expensive to buy gas there than it is here.

No kidding, right.

$9 a gallon.

Thanks, guys.

Thanks, Larry.

Last -- one more question, please.

Yes, sir, your final question comes from David Palmer with UBS.

Hi.

Just kind of a modeling question.

We don't have to get to exact numbers here, but your occupancy and other operating expenses, you've trended up over 100 basis points each of the last two quarters.

I know you mentioned utilities, you mentioned Katrina for this quarter, but even when you kind of back out Katrina you're still up pretty significantly heading into '06 it doesn't look like some of these utilities expenses will back off, and I know the mix is a little higher for occupancy for your international businesses, which will probably keep on getting bigger, so is this a line item that we should be modeling up close to that 00 basis points and just thinking about some of these other line items such as food, maybe payroll offsetting that somewhat?

Okay, David.

I would say if you're modeling it from the a perspective of YUM! total you've got to be mindful of the mix of the businesses.

Because if you look at occupancy and other, as the international and China divisions grow, and become bigger factors than the U.S. is today, they both have higher occupancy costs than the U.S.

So you will have a mix factor driving that.

The other thing that's happening in the U.S. in occupancy today this year is the lease cost restatements that we had in the fourth quarter last year.

That added a couple million dollars per quarter this year, first three-quarters.

So that's affecting that particular line item in the U.S. and the comparisons.

That basically goes away in fourth quarter.

And I would -- we'll have more details for you in our December meeting, and then we'll have a release immediately prior to that.

But I would say most likely our benefits for margin improvement next year would come in food costs for sure, and then probably secondarily labor.

Okay.

Thank you.

Okay.

Well, thank you all for being on our call.

Wrap it up.

We had a very good third quarter, and we're having another very good year as we go into next year we're very confident that we can at least deliver at least 10% earnings per share growth in 2006.

We've got our investor conference coming up.

What's that date again?

December 6.

December 6.

We'll outline our progress that we've made this year, the plans that we have for next year, and I think even more excitingly, talk about what we can do with the brands that we have today and the potential that we have.

So thank you very much for your call and calling in.

Appreciate it.

Thanks.

This concludes today's conference call.

You may now disconnect.