百勝餐飲集團 (YUM) 2006 Q1 法說會逐字稿

Good morning.

My name is Marvin, and I will be your conference operator today.

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

Brands First-Quarter Earnings Conference Call.

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

After the speakers’ remarks there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Jerzyk, you may begin your conference.

Thank you, Marvin.

Good morning everyone and thanks for joining us.

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

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

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

We would also like to advise that this conference call includes 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 and may continue be used while this call remains in the active portion of the company’s Web site, again, at www.yum.com.

This will be until 5 pm Eastern Time, Friday, May 5, 2006.

Before we get going, I’d like to make one announcement.

We do have, coming up later this year, a Yum!

China investor conference.

It is scheduled for September 7 and 8, 2006.

The Yum! team will host the second China investor conference in Shanghai, China.

Our investors and analysts are invited to attend this two-day meeting with our Yum!

China management team.

Attendees will visit local KFC, Pizza Hut and East Dawning restaurants, as well as the Shanghai distribution center.

The second day we will go to tier-3 and tier-4 cities, so you will have the opportunity to fully understand what our brands are doing outside the really big cities in China.

Please contact Yum!

Investor Relations at 888-298-6986, and mention that you want to confirm — that you will plan to attend this event.

We need to hear from you as soon as possible to complete the details for this unique opportunity.

Okay.

And with that, I would like to announce that 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.

And now I’ll turn the call over to David Novak.

Thank you, Tim, and good morning, everybody.

As you may have seen from our release last night, we reported outstanding results for the first quarter with 12% operating-profit growth and 18% EPS growth.

Importantly, each of our businesses contributed operating-profit growth to this performance.

Overall, our growth continues to be lead by profitable international and China restaurant unit expansion.

For this quarter, our U.S. business really stepped up in earnings power as the overhang of high commodity prices has solidly reversed with a much better outlook going forward.

Looking ahead to the full year 2006, we are very confident that we can again grow EPS by at least 10%, which is our annual target.

In fact, I’m pleased to report that on the strength of our first-quarter results in the U.S., we have raised our forecasted EPS for 2006 to $2.81 or growth of at least 11%.

Given the challenge of extensive global media coverage related to avian flu, we are pleased to begin 2006 with such strong results.

This again points to the power of our portfolio of brands and significant worldwide geographical diversity.

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

In the China Division, we believe our team moved very aggressively to remedy the consumer-perception issues about last year’s red dye and avian flu affecting KFC sales within mainland China.

As you saw in the release last night, we are pleased to report that system sales for KFC in mainland China grew by 33% for the month of March.

Importantly, our development of new company-operated KFCs in mainland China continues because returns continue to be so strong.

KFC is the leading restaurant brand in China by a wide margin, and the lead widens further every single day.

We open an average of a little more than one new KFC every day.

As of the end of Q1, we had a total of 1602 KFCs in over 350 cities of mainland China.

Given the results through March, we are confident KFC sales have rebounded from the red-dye issues of a year ago and the avian flu impact of the fourth quarter.

Based upon our consumer research, there remains a low but declining level of consumer concerns related to avian flu.

The good news is our ongoing consumer research shows all of our KFC brand measures have moved in the right direction and are back in the same range they were prior to the red-dye and avian-flu incidents.

These measures include most-preferred brand, food safety and customer penetration levels over the past month in the 47 cities we monitor.

Even more good news continues to come from our Pizza Hut business in mainland China.

Mainland China Pizza Hut now has over 200 casual-dining restaurants in over 50 cities and is also, clearly, the leader in that category.

The Pizza Hut business had a great year last year with very strong system sales and that has continued into the first quarter of this year with 31% new-unit growth, compared to last year, and 13% growth in same-store sales for the first quarter.

Our China team just did a fantastic job of launching the stuffed-crust pizza that was developed in the United States.

It has had an outstanding level of trial by our customers, with our Pizza Hut restaurants there busier than ever.

Illustrating once again, the power of our best -practice sharing.

Overall, I’m happy to report we have never been more bullish than we are today about the long-term prospects for KFC, Pizza Hut and potentially other Yum! restaurant brands in mainland China.

I just returned from one of my regular trips to China.

We had an extensive review of the China business, and we can say confidently, more than ever, that our strategy of building dominant restaurant brands in every category in China is the absolute right path.

We continue to have the strength in leadership; our team is fantastic; we have great brands and the infrastructure we need to leverage the China market growth in a big way.

I continue to be amazed by the power of our brands and the passion of our people.

You literally have to see our China business to believe it.

And I encourage all of you to attend our China investor conference.

Now on to our Yum!

Restaurant International Division, or YRI.

We are very pleased to see solid performance from our YRI portfolio of the businesses.

For the first quarter, we achieved 6% growth in system sales, local currency basis.

Importantly, this business continues to be even more focused on generating growth from our substantial franchise infrastructure that we have in place all around the world.

YRI opened 124 new restaurants in the first quarter and virtually all of these, or 98%, were by our franchise and joint-venture partners.

Most significantly, franchise fees grew by 10% in the first quarter to a new record, and our overall operating margin improved to over 20% for the first quarter, which is another record.

This business generates solid consistent growth that is geographically diverse with high returns and generates plenty of free cash flow.

On the company side, we are struggling right now with two of our largest businesses;

Pizza Hut and KFC in the United Kingdom and our Pizza Hut business in South Korea.

Same-store sales remained down for the first quarter in both businesses, and this placed a slight drag on YRI overall profit growth.

We are very focused on turning these businesses around and expect to see some improvements as the year progresses.

There are some signs of a turn in sales, but it is still early.

Meanwhile, our other YRI company markets;

Mexico, Australia and Canada, are doing fine with positive same-store-sales growth and higher operating profits.

Importantly for YRI, our new-unit pipeline looks very good, and we expect to meet our expansion plans for 750 new restaurants in 2006, with over 80% of those coming from our franchise and joint-venture partners.

So for the near term, our continued profitable expansion remains on track and has high visibility.

YRI continues to build one heck of a track record; that would be the seven straight years of opening over 700 new restaurants, or about two new restaurants opening every day.

In terms of continued growth over the long-term for YRI; we are pleased to report continued progress in Russia and India, two important developing markets.

In Russia, we finalized our transaction with Rostick’s during the first quarter and are now on our way to converting these restaurants to Rostick’s-KFCs.

As a result, we can see a clear path to having over 100 KFC locations in Russia in the near term, something that took us 10 years to do in both China and India.

Speaking of India, I just came back from one of my trips there, and we are very excited about our long-term growth prospects for both Pizza Hut and KFC.

Pizza Hut is already the most trusted restaurant brand with 130 restaurants.

The early results for recent, new KFC openings are promising, and our teams there are demonstrating an outstanding level of operation execution, similar to what some of you have seen with our China business.

Russia and India are two developing markets where we believe we can leverage our YRI capability and our leading brands in a big — big way.

We look for each of these markets to contribute to YRI growth three to five years from now.

Now let’s move on to the U.S. business portfolio.

In the United States, we have solid same-store-sales-growth momentum and new programs backing us up.

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

For the first quarter, Taco Bell delivered an exceptional plus 8% growth in same-store sales, lapping plus 5% a year ago, driven by an — about an equal growth in transactions and price mix.

Taco Bell continues to build it’s tremendous track record of the past five years.

We just completed a limited–time-offer of a Grilled Stuffed Burrito line extension, a chicken — excuse me — a Chicken Caesar Grilled Stuffed Burrito version, which was very successful.

Back in Period 2, we permanently launched the highly innovative CrunchWrap Supreme, which is “good-to-go,” as the advertising says.

Right now, we are going back to the Big Bell Value Menu, themed around the Spicy Chicken Burrito.

As — as we have said before, you will always see us with the great balance in our marketing message.

In this case, moving from a higher-end Chicken Caesar Grilled Stuffed Burrito to the $0.99 to $1.29 Big Bell Value Menu.

Taco Bell has more product news and excitement ahead.

We continue to steadily get better at operations, new-product development and advertising our brand positioning as the ”Bold Choice.” We remain confident of our ability to generate plus 2 to 3% same-sales growth for the rest of 2006.

Longer term, for our Taco Bell business, we have also started unit expansion again in the United States.

Over the past 12 months, the Taco Bell U.S. system has grown by 1%.

We are happy to see that the number is moving up and expect the rate of growth to steadily increase over time.

Importantly, the new Bold Choice restaurant design the team has put in place looks to be a winner.

Our customers, franchisees and employees all have a very favorable response to this outstanding new asset.

Now on to KFC.

KFC continues to also make steady progress with improving operations, new-product development, and excellent advertising behind the brand position of World Famous Chicken.

We had an excellent first quarter with same-store-sales growth of 5%, lapping solid growth last year.

Particularly impressive for KFC was the positive lap of plus 10% growth in same-store sales last year in Period 3, when we reported 2% same-store-sales growth.

We recently had an opportunity to view KFC’s new-product pipeline, and after consuming a lot of delicious calories, I can attest that it looks as good as ever.

The team is confidently working on some great ideas for 2007 and beyond.

Immediately ahead, we have some great product news at KFC for both the dinner occasion, with a family meal providing excellent value, and a great new product for the individual-meal occasion, which leverages KFC’s core strengths.

We’re also confident that KFC can grow same-store sales plus 2 to 3% for the balance of the year.

Now before I go on to Pizza Hut U.S., let me go back a moment to last fall when many people were concerned about the impact of high energy prices on the U.S. consumer.

All of this was post Katrina, if you recall.

We talked in our call last October about how we felt, based on our research, that well-positioned brands with strong value perceptions would continue to do well despite this headwind.

Conversely, those brands which did not have strong value positions or improving value positions would likely struggle.

We believe results over the following months have proven out that forecast pretty well.

And in the face of rising gasoline prices again, we bring that research in thinking forward one more time for your consideration.

We mentioned our research and thinking at that time as we felt both Taco Bell and KFC were well positioned, while Pizza Hut was not strong enough.

Taco Bell and KFC have both improved their value positions over the past year and are continuing to do so.

We believe that they remain in a very, very positive position today.

With Pizza Hut, we have been working hard to crack the code for our brand to improve it’s value positioning.

We just aren’t there yet.

And I have confidence in the team that they are working and testing on the right kinds of various profitable options.

The optimism I can have right now is that the second half of this year provides much easier laps for us versus a year ago, and we are cautiously optimistic that we will begin to see slightly positive performance later in the year.

I hate to say it and I hate to refer to soft laps as a reason why we can have positive sames— same-store-sales growth, but the reality is that’s where we’re at with Pizza Hut today.

We will make progress over the long term, and we will build the brand the right way, like we have turned around both Taco Bell and KFC.

Importantly, overall, we remain confident that for 2006 our blended U.S. same-store sales will grow by our target of plus 2 to 3%.

Last but not least, the power of our portfolio of leading restaurant brands in global diversity makes us Not Your Ordinary Restaurant Company and a cash-generating machine.

We continue to invest appropriate capital for continued growth.

Our return — our returns, as you know, are very good, which enables each of our businesses to generate free cash flow.

We will continue to build a stronger balance sheet, buy back our own stock at great prices the market offers us and pay a meaningful dividend.

Over the long term, we will continue to build value by executing against our unique growth strategies with high returns that differentiate us from other global consumer companies, making 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, steadily improving restaurant operations, and building category-leading brands and multibranding those brands.

Before I turn the call over to Rick Carucci, our CFO, for more details on the first quarter and our outlook for the year, let me wrap up my comments.

When you step back, our overall global business looks strong.

Our U.S. business is performing very well and has a much better commodity outlook after two very tough years.

Our first-quarter U.S. blended same-store-sales growth was one of the best we have ever had, and it lapped an excellent first quarter each of the last two years.

We expect our Yum!Restaurants International Division will have another good year, despite some first-half challenges and after a great 2005.

China had a good first quarter.

We think it’s back, and we have an unparalleled opportunity for long-term profitable growth.

But do keep in mind, we are still very early in the year.

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 four items today.

First, the enhancements to the format of our earnings release; second, a review of the first-quarter results; third, a brief review of important trends and how these trends may impact our 2006 performance; and fourth, an update of our cash-flow expectations and our plans for this cash flow.

Before I start into the quarter, let me tell you a little bit about our enhanced earnings release format, which you saw last night.

Specifically, we highlighted key financial and operating metrics to better reflect what is important in each of our business segments.

We have always targeted to be transparent with all aspects of our business.

We are pleased with this new format because it provides additional measures to track our progress.

For example, for our highly franchised YRI division, we use operating margin, which is operating profit dollars as a percent of revenue dollars.

We believe that this metric is more telling of the overall YRI profitability than restaurant margin.

On the other hand, for our primarily equity-focused and company-operated China division, we added sales-growth measures for the key mainland China market in addition to keeping restaurant margins as a key financial indicator.

Finally, for our U.S. division, where we are transitioning to a more franchise-focused business, we provided a balanced set of financial and operating measures, reflects not only the current business, but also that it is moving to an even more of a franchise business.

We hope the new format provides better understanding, clarity, and transparency to our businesses.

As always, all of our financial tables are included with the release last night.

Now let’s talk about Quarter 1.

I am pleased to report a great start to our year.

We are particularly pleased to deliver 12% growth in worldwide operating profit.

All three of our business segments contributed growth and in Q1 we were led by strong U.S. business results.

The U.S. had it’s best profit growth since Quarter 3 of 2002.

Let’s review each of our businesses.

First, our China Division results were heartening, particularly given we were lapping a very strong Quarter 1 from last year.

As a reminder, both revenues and profits were up 25% in Quarter 1 of 2005.

Sales trends have definitely improved, and restaurant margin is back over 20%.

Overall, operating profit was up 8% on local currency and plus 10% after a favorable conversion to U.S. dollars.

We are confident that this quarter and current sales trends will lead to a very strong year from our China Division.

Our International Division, YRI, had profit growth of local currency of 6% and 3% after negative ForEx impact.

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

The strongest performing markets were South Africa, Asia, Middle East and Caribbean-Latin America.

This double-digit growth for franchise markets came despite some short-term impact in Quarter 1 in certain Middle East and European countries, due to avian-flu-perception issues.

For these countries, the impact was only felt in our KFC business and only for a relatively short period of time.

Our Pizza Hut franchise business was not impacted and, actually, is doing quite well.

Overall, there has been a minor impact of avian flu on our YRI business.

In Q1, we continued to have weak performance in our U.K. businesses.

These results were only partially offset by solid performance in other company markets.

Unfortunately, we expect weak performance in the U.K. the first half of the year.

Later, I will put some dimensions around the first-half softness to explain why we expect improvement in the second half of the year.

In the U.S., our excellent tier-1 results were fueled by sales growth and lower commodity costs.

Importantly, we had strong same-store-sales growth again for Quarter 1.

Our blended system-same-store sales were up 5% for the quarter.

These higher sales, combined with an $8 million reduction in commodity costs, led to a 19% increase in U.S. operating profits.

Our U.S. profits were hampered the past two years due to cyclicly high commodity prices.

Our Company restaurant margin improved nearly two full points during the quarter, driven by the lower food costs.

Sales leverage offset the expected increase in occupancy and other costs related to higher utility costs.

Additionally, within other income and expense, the U.S. business absorbed a one-time charge of the termination and settlement of a beverage contract at Long John Silver’s and A&W with it’s previous beverage supplier.

This was a positive economic decision for Yum!, which will yield benefits over the next several years.

Excluding this one-time charge of $8 million, the U.S. profit would have grown by 24%.

In the earnings release for the U.S. business, we separately showed franchise sales and company sales in our earnings release.

As I make the following points, I encourage you to look at the key metric table under the U.S. business of the earnings release.

Company sales were down 1% versus prior year.

This is largely a result of selling 308 company restaurants to our franchisees over the past eight months.

This is also why revenues in the U.S. were flat with last year.

Essentially, the switch in company ownership is a revenue trade-off from retail sales to the royalty payment for those sales.

On the flip side, franchise sales and franchise fees were both up a strong 9% for the quarter.

This was driven by strong same-store sales across the U.S. systems and the benefit of refranchising on these line items.

As outlined to you in our New York Investor Conference last December, we will continue to refranchise company-owned restaurants over the next two years.

We reiterated the financial impact of the two-year plan in our release last night, including the ultimate benefit to margin and return on invested capital.

Please note that as a result of continued refranchising in the U.S., we will continue to see similar impacts on our results as we saw in Q1 for revenues, company sales, franchise sales, and franchise fees.

In Q1, operating margin increased from 17.8% last year to 14% this year.

Over time, as refranchising continues, operating margin will represent a true measure of the overall profitability of the business.

And we wrap up Q1, there are a few additional points I would like to make.

Importantly, this was a high-quality quarter, driven by 12% growth in worldwide operating profits.

In the non-financial — sorry, in the financial, non-operating areas, we saw virtually a flat tax rate versus last year and a $7 million increase in interest expense, reflecting primarily the higher costs associated with our variable-rate debt and somewhat higher debt levels.

Another thing that’s really exciting and important about our Company is that we have been able to buy back a lot of shares.

Our diluted share count continues to head down as we are utilizing our significant free cash flow to buy back stock of what we think is a really good value.

In fact, Q1 share count was down 6%.

That wraps up Q1.

Now let’s review some trends to our businesses as we look forward through 2006.

First, let’s talk about our China division.

Importantly, we are still on pace to achieve our substantial new-unit-development targets for China.

With 400 new restaurants for the China Division, we remain extremely confident that we will be able to achieve our goal of at least 20% operating profit.

Now, I want to remind you of what we’ve said in the past in terms of quarterly performance for China in 2006.

We are lapping very easy numbers in Q2 and to a lesser extent in Q4.

For Q3, the laps versus a year ago is closer to normal, and our Q3 operating profit last year included $14 million of supplier financial recovery and other income.

So keep these in mind as you build your expectations for our business throughout the year.

Second for YRI, we expect the second quarter to be a bit weaker than Q1.

We then expect a strong second half for YRI.

These expectations mostly reflect the impact of the U.K. business.

Excluding ForEx, for the first half of the year in 2006, we expect $15 to $20 million lower profits from the U.K. than what we received in 2005.

This represents about a 10% drag on YRI’s first-half earnings growth.

In the second half of the year, we expect more effective programs, and we are lapping weak results from 2005.

As an example, our same-store sales in the second half of 2005 in the U.K. were down 8%.

Overall, instead of a drag on earnings per YRI in the first half of the year, we expect the U.K. to positive — positively contribute to an increase in overall YRI earnings for the second half of 2006.

Additionally, we believe we have some good news in that despite a discovery of avian flu in the U.K., sales for KFC in the U.K. have actually been positive for the past two weeks.

Our long-term optimism for the U.K. market is reflected in the fact that this year, we’ll open about 50 new restaurants for each brand: KFC and Pizza Hut.

This growth of 100 units is consistent with our historical unit growth in the U.K..

Overall, we expect YRI to achieve about 10% operating profit growth for the full-year, excluding ForEx and the impact of the 53rd week.

We now turn to the outlook for the U.S.

We are off to a great start.

Same-store-sales growth is strong, and we expect to be up about 2% to 3% for the year, as David mentioned.

Within our U.S. company restaurant-cost structure, we expect the commodity impact in Q2 to be similar to Q1.

In the second half, we begin to lap some commodity costs that began to soften in 2005.

We are cautiously optimistic about commodities being flat for the second half.

Chicken costs, our number-one U.S. food-cost item, will be down for the year, primarily based on contract activity.

We are hoping that two other important U.S. cost items, cheese and beef, to be flat or slightly down in the second half.

Again, this could change quickly, so we will wait and see how things go in the second half of the year.

Based on this improved commodity outlook and our strong Q1 same-store-sales performance, we now expect full-year operating profit growth of at least 6% instead of the previous 5%.

This improved U.S. outlook drove our full-year EPS guidance increase to $2.81.

Now let’s talk about our cash flow and balance sheets.

We continue to expect to end this year with another record of over $1.3 billion in net cash provided by operating activities.

And we plan to invest about $670 million in our business for capital spending during the year.

This will result in over $600 million of traditional free cash flow.

We are fortunate that even after we invest capital in our business, China, YRI and the U.S. all generate positive cash flow.

We expect additional cash flow of $150 million from refranchising proceeds, another $150 million in employee-stock-option proceeds, and $40 million from sales of surplus property, equipment and other items.

When you add it all up, that’s nearly $1 billion in available free cash.

Consistent with our recent past, our stated approach is to return this cash to our shareholders in the form of share buybacks and a dividend.

We believe we are continuing to get a great value in our own stock buybacks and at Quarter 1, we purchased 7.6 million shares for $371 million.

Our diluted share count decreased 6% to 286 million shares for Q1.

This was the lowest level we have experienced as a public company.

For the full year, we expect our diluted share count to decrease by at least 4%.

In addition, we now pay shareholders meaningful quarterly dividend that we increased by 15% last year.

We review our dividend policy with the board every year during Q2, and that meeting is nearly upon us.

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

We continue to feel very good about our balance sheet and the substantial amount of free cash flow we are generating while comfortably funding all of our growth and maintenance-capital needs.

In summary, we expect 2006 to be another successful financial year for our shareholders, because we expect to deliver — first, 2006 EPS of $2.81 or at least 11% growth versus last year.

We have already taken up our forecast based on outstanding U.S.performance in Quarter 1.

We expect another year of strong cash flow and returning cash to our shareholders.

And finally, while getting short-term results that are strong, we expect to continue building long-term value in our international businesses: YRI, and China.

YRI will build through high-return franchise expansion.

And our China division will build with high return company restaurant expansion.

We believe we have both the opportunity and the capability for long-term growth, with EPS growth of at least 10% year after year.

That’s it for me, David, back to you.

Thank you very much, Rick.

So let me wrap it up here, and we’ll take some questions.

We had a great first quarter in spite of all of the news about avian flu and perception issues in some areas around the world.

The good news is, it appears that consumers are clearly getting the message that fully cooked chicken is safe to eat.

We are feeling confident about the year, even though it is early.

Translation — don’t get ahead of us or the business.

We give annual guidance — now it’s plus 11%, and remember, we are only on the 25-yard line.

What we feel good about is that it is — it is more and more likely we will see all three of our businesses contributing profiting growth to Yum!’s results, making it much more of a quality operationally driven performance for 2006.

The health of the U.S. business looks better than it has in three years and we think our China business is on it’s way to a great year.

So let’s open it up now for some questions.

Before we open it up to questions, I just want to clarify one comment.

In Q1 for the U.S., our operating margin increased from 11.8% last year to 14% this year.

With that, we’ll open it up for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of John Glass with CIBC.

Thanks.

Good morning.

I had a question on Pizza Hut; and then maybe just a quick follow up on China.

On Pizza Hut, maybe just broadly; what is the challenge here, particularly with the value message?

Seems like the competitors get that.

Is there something structural in your business?

That is to say, your different sales channels versus your peers, that makes it more challenging?

Simply that you haven’t come across the product and message yet?

I think that — in the category, in an environment like we’re in right now, you need two things: you need innovation and strong value positioning.

I think what Pizza Hut has really demonstrated a great ability to do is bring great product news to the category.

But, as you point out, I think we definitely are missing on the value front versus our competitors.

I think we’re looking for the right way to do it.

We offer good value to our competitors.

It’s a very competitive category.

It’s category that’s basically flat right now.

But I think our competitors are doing a superior job, based on our research in terms of really communicating their value and driving it home in a very effective fashion.

So we’re working on developing the right value proposition, and we also want to make sure that we communicate it effectively so we get credit for it.

One thing we don’t want to do is we don’t want to chase — chase sales in an unprofitable fashion.

We’re looking for a way to do it in a profitable way, and we’re going to go about this in a careful fashion versus just discounting our products in some willy-nilly fashion.

So what we want to do is really find the right — right way to communicate the value that we offer.

We’re in the game, we’re just not doing as good a job presenting our proposition and communicating it effectively.

Got you.

And then just to understand — on China, you differentiated between mainland China and the China Division.

What’s gone on in the other division markets, and is that gap sustainable or was it just the timing issue this quarter — or month?

It’s mostly a timing issue for this quarter.

There is a difference in the growth rate between mainland China and the China division.

Mainland china does have a higher growth rate than the rest of the division.

What drove the large difference this period had to do with the timing in Taiwan of the New Year — Chinese New Year.

Taiwan is on a lag calendar, so Chinese New Year was in the numbers last year but wasn’t in the numbers this year.

Thank you.

Thanks, John.

Next question, please, Marvin.

Our next question comes from Larry Miller with Prudential.

Hi, guys, thank you very much.

Just wanted to revisit the U.K. and Korea for Pizza Hut, specifically the U.K. — and why you might be more confident in the second half?

I think if I remember correctly you were talking about a marketing-pipeline problem.

Can you talk about the issues, as you see them today, in those two markets?

And I did have a another questions, if I may, after that.

I’ll let David talk, maybe, talk about some of the marketing things that we’re doing.

But just as a reminder on the numbers, what I tried to highlight, in my speech, was for the balance of — for the second half of the year, in 2005, our same-store sales grew — results in the U.K. were minus-8%.

They were much stronger than that in the first half of the year.

As we get into that, this is — we’re not proud about being able to lap the weak numbers, but reality is, that it’s a much weaker second half of this year that we’re lapping than the first half of the year.

Because again, the terrorist activity, which accelerated sort of the decline in retail sales in the U.K., occurred in just about the middle of the year.

Rick, you are saying — if trends don’t change, they would turn positive just on that basis alone?

Yes.

Okay.

And I think just from an overall business perspective when — when you look at the KFC business in the U.K., we’re very pleased that the team is aggressively adopting best practices around the world.

We have had our — they have met with our U.S. business, Australia business; they are combining a lot of the best practices and building them into their marketing plan.

For example, we’re offering better balance between the high-end chicken-on-the-bone family meal plus the individual transactions.

We’re working on a new advertising campaign that really drives the taste differentiation we have versus competition.

And the pipeline is accelerating much quicker, much in the same way that KFC’s pipeline developed in the U.S. because the team is reaching out to the rest of the world and taking the best practices.

So I think we’re really on our way, we have got some early signs of improve with KFC in the U.K.

It’s early, but I really feel confident in the direction that the team has.

The other thing is, when you look at Pizza Hut, we got a great casual dining business and a delivery business there.

One of our challenges in that macro economy there is — is value.

The team is working on — on a way to really redimensionalize the Pizza Hut value more competitively in the category.

They have launched a new advertising campaign that really gets at the overall of pizza as a food type, which is basically, we’ll make the pizzas, you do the math.

In terms of just really emphasizing the — the per eater value that you get — amount of food for money per eater with pizza.

And we’re confident that we’ll see some progress.

We’re confident, based on the research that we’ve done, that we’ll see some progress.The other thing is we’re — we’re also making plans to launch some of the successful products that we have had here in the U.S. in the U.K. for Pizza Hut.

We think we have the benefit of the weaker numbers in the second half of the year, but I also think the team is doing the right kind of stuff.

The same is happening in Korea.

Korea is our other equity market that we— we need better performance in.

We got a soft second-half overlap.

But I think the big challenge we have there is to get a better balance between value and product innovation and the team’s — team’s working on it.

In the past — just to follow up on that question, and that will be my last question —

Yes.

You had really reduced the equity ownership in a lot of markets.

Is there consideration — I know you have a joint venture in the U.K., but maybe Korea — if that’s something you guys have on the table?

We have a very strong philosophy of you have to earn the right to own.

So if we’re not getting a return for our shareholders that immediately becomes a strong consideration.

Of course, we don’t do that just based on a couple periods of results, we do that in a very thoughtful fashion.

But we continue to look at our ownership structure, and we want to do the best possible thing we can for our shareholders and we have been, I think, proactive on that front.

We don’t want to get any phone calls telling us that we’re being stupid with our shareholder’s money.

Thanks very much.

Thanks, Larry.

Next question, please, Marvin.

Our next question comes from the line of Rachael Rothman with Merrill Lynch.

Good morning, guys.

Good morning.

Can you talk about — as you transition to pretty aggressively refranchising in the U.S. over the next two years, I guess your thousand-unit target — what type of G&A leverage we should look for?

Or G&A savings?

I think — just a terminology there, Rachael, I want to clarify, because you said aggressive — moving aggressively.

We sold, I think it was 308 restaurants — company restaurants over the last 12 months.

We’re only talking maybe going up a little bit over 400, maybe to 450.

So it is a step up, but it’s not — I wouldn’t call it aggressively.

Okay.

I had a thousand, so 500 —

That’s over two years.

Yes, exactly.

Essentially, what we’re assuming is that the refranchising impact, without any G&A offset, would have a slight negative earnings impact to us in the area of about $30 to $40 million.

We expect to be able to cut G&A by at least a comparable amount to make that offset.

And that’s why we have been saying that we expect no impact to earnings.

And is there something different about the units that you’re going to be refranchising?

I guess you guys are still expecting the $150 million in cash proceeds, but it’s a slightly higher pace of refranchising?

Are they smaller units or less profitable units?

Or something different about the market?

Well, there are two pieces.

First of all, again, as we’ve moved our percentage franchising up over time, we’re getting towards the more and more marginal closer call, so that’s why you don’t as big an impact on operating profit as we did before.

In terms of pure cash, that’s driven largely by — we are refranchising a fair number of LJS restaurants and those are — and also some other weak-performing — restaurants, which generally don’t generate a lot of cash and proceeds, but does give the benefit of reducing our future capital and improve our margins.

Quickly, if I could — on your equity and income during the quarter, it declined by about $10 million, was there some offset to that or — ?

Are you talking about the other income expense?

Yes.

The biggest thing there was an $8 million charge the U.S. that Rick talked about, related to the beverage-contract termination.

Thank you very much.

Thanks, Rachael.

Next question, please, Marvin.

Our next question comes from Peter Oakes with Piper Jaffray.

Hi, I actually have two.

First on the U.K.

I was hoping you might be able to put some context into that minus-8% comp that you are going against in the second half?

What — approximately what did we go — what are going against, here in the first half?

And maybe give us an update as to how it performed there in the first quarter?

I don’t know if you have that handy.

But if you could just — ?

Yes, I don’t have that handy.

But we were probably — roughly flat in the first half last year.

We were positive in the first quarter and slightly — and negative in the second quarter.

We were probably about flat in minus low numbers for the first half last year.

Okay.

Thanks, Rick.

And then approximately, where were you here in the first quarter?

For the U.K.?

I’m sorry.

For the U.K., yes.

The U.K. was, in total, in the range of, like, four, something like that.

Okay.

Good.

And then—

3 or 4.

Yes.

And then for — for China and the other markets that you referred to.

I think Middle East and parts of Europe, where you did have some temporary impact in avian flu — can you give us a sense as to chicken mix, without giving up anything here competitively, but just kind of the texture — from the prior kind of normalized level to where you kind of hit bottom on chicken mix?

And how much have you clawed your way back?

I’m sure that’s something you take a look at periodically, just to give a sense — just as far as consumer confidence from that dimension?

What do you mean by chicken mix?

I’m sorry — I know what you mean by chicken mix but what kind — ?

Yes, David, you have done — like a year ago, I think you were promoting a number of pork items when the combination of the dye kicked in and — and also, initially, with the avian flu.

So is the consumer’s confidence in the chicken protein as a whole — how far are we off of the prior normalized level still?

We’re pretty much almost all chicken, in terms of what the mix is.

We had a fish product in China — okay, that we launched.

But that was only one window.

One —

Yes.

Peter, this is [inaudible] now.

We do run non-chicken items in China.

And primarily in the past, they’ve been either pork items or fish items, but those are all limited-time-only offers.

So our main core business is — is chicken.

And I would say that just — this is a guess, okay.

But I would say it’s — the mix is— even when we do that, is over 90%.

Okay?

So I think that’s more than a good guess, okay?

All right.

Good.

Thanks a lot.

Thanks, Peter.

Next question, please, Marvin.

Our next question comes from the line of Jeffery Bernstein with Lehman Brothers.

Great.

Thank you very much.

I actually had two questions.

One, just a follow-up on an earlier question regarding the refranchising in the U.S.

Just wondering if you can give a little bit more color on learnings you have seen, specifically — feedback from the franchise community, in terms of demand for these units.

It seems like, obviously, you are refranchising some below the system average.

Just wondering is there were any common concerns?

And then I do have a quick follow-up.

Thanks.

Again, we have been refranchising for a while.

We have a dedicated team that handles that and they have done over the years — over $1 billion of refranchising.

So we have a very strong team.

So far the demand is good, in terms of the deals we have already floated.

We have had multiple people interested.

So again, we haven’t floated them all yet, we do that overtime.

But we’re pretty confident we’ll — we’ll find demand.

I think what franchisees like is the term and opportunity.

I mean, so they look at — if we earned the right to own them we wouldn’t been selling them.

So they look at the business and say, hey, I can bring my sweat equity and my operational focus into the business and turn the business around.

So that’s what they look as the real financial upside of it.

And then just quickly on China, as we look into the second quarter, obviously, there’s a lot to talk about lapping the Sudan dye incident.

Just wondering if you could talk about directionally, realistic sales growth expectations.

I was wondering if there was any reason on why comps couldn’t come up 20 to 30%?

And how we should think about the potential flow through to the earnings if you’re able to report such strong comps?

Thanks.

Again, we have to clarify which time period we’re talking about and what — what time of year we’re overlapping.

You have to remember, at this time last year, we were overlapping the Sudan-red issues, and that’s why you are going to see very large comp growth during that period of time.

So in terms of the full year — we have sort of just stayed on our normal growth rate, which is company-sales growth to the division of at least 22% and systems-sales growth for the division of at least 22%.

I think that as - as Rick pointed out in his earlier comments, our store-level margins, which are very important in China because we have 67% company-store ownership, are now over 20% again.

So we have a team that did a great job of managing the business in a very difficult situation, keeping our margins — I think around the 19 — 18, 19% level.

And now we’re in the over 20s again, and as the sales come back, we expect — to your question, we expect to get the appropriate flow through.

So it is reasonable to assume comps, at least offsetting what they were down last year in the 20%-plus range in the near-term — lapping the Sudan?

I think the best thing to do Jeff, is to look at — look at kind of the two-year growth, and then average it.

For example, in the first quarter we did — for the division — China Division, we did 14% local currency lapping 26% a year ago.

So a total of 40% over two years, averaging 20%.

And that rate improved a little bit in the fourth period as we started lapping the Sudan-red issue.

I kind of look at it that way, to get at — I think, where you are trying to go.

And I look at, overall — if you look back last year, Period 2 was the biggest impact of Sudan red, actually — or Quarter 2.

Quarter 3 was actually a pretty reasonably good sales quarter. if you go back and look systems sales growth.

It wasn’t up to our target, but it had definitely recovered.

And then Q4 with avian flu — we were impacted by avian flu.

So I kind of look it at that way, just in terms of a two-year growth rate — to kind of get where you are going.

As always, our guidance is based on what we expect to do over the longer term.

If we can do better this year, we certainly will.

And we’ll update you in our guidance as the year goes on.

Thank you.

Thanks, Jeff.

Next question, please, Marvin.

Our next question comes from the line of David Palmer with UBS.

Hi, guys.

Congratulations on that quarter.

Thank you.

My question is on your U.S. innovation.

It seems that your pipelines — your innovation pipelines at KFC and Taco Bell are pretty set for ‘06 and maybe beyond.

My guess is that you have really improved that over the last few years and maybe you can comment on that.

But my question really is— is about Pizza Hut.

It seemed that you had confidence about your pipeline there, earlier last year.

My guess is that, since the middle of last year, there’s been a disconnect between the test results and the national roll-out results at the Pizza Hut chain.

Do you agree with that?

And if that’s so, why do you think that’s been?

Was it the competition maybe getting you in ways that you didn’t think?

Was is a more value-oriented consumer with the higher gas prices in the post-Katrina world?

Or was it something more internal with your testing and innovation at Pizza Hut where you have looked internally and figured out a better way to do things?

Thanks.

All right.

Well, first of all I — I think when you look at Yum!

Brands in total and our ability to innovate, I humbly would offer up that I think we are probably the best in the category.

No one has introduced more new products in each of the categories that have had success than — than Taco Bell, KFC, and — and Pizza Hut.

When you look at Taco Bell, you are looking at a business that has a 70% share of a category.

And we’re on a run.

We have a very unique position.

And because of our uniqueness, we’re able to basically launch — launch our product, and — without having a direct competitor that can do anything to — to disrupt whatever activity we have on a national basis.

So I think that’s a big advantage that we have at Taco Bell.

And frankly, the same can be said for KFC.

KFC in the fried chicken category is over 50% share.

So you’ve a much — much stronger leadership position, which I think gives you an insulation and an edge when you — when you truly innovate.

I think when you look at Pizza Hut, we have had a great record of innovating on — on the pizza front.

One of the things that we have had difficulty doing, because of the competitive set, is you never know what competition is going to do.

And so when we launch a product, even though it has been tested and we feel good about it, if — at that point in time, when we are launching something new and Domino’s comes out with their 5-5-5 deal, or — or Papa John’s introduces a pan pizza when we’re doing a pan-pizza promotion, we get more into a share battle — a share mind battle.

And I think that’s one of the factors that has made it more difficult for us to — to predict with as much accuracy, how we’re going to do, as we have with Taco Bell and KFC.

Having said that, we think when you look at Pizza Hut — if we just went back and looked at all of the products we have introduced in the last five years, in fact, we had a discussion on it yesterday — we have a stable of products that have — that are outstanding products that have very low awareness that — that we could come back to.

We have a very vibrant pipeline if you just look at what we have off the shelf that we could come back to.

Products that we know the consumer likes.

Products that we know we could advertise effectively with a different insight.

So we really think the product news piece of — of Pizza Hut is not a problem.

We think we have got innovation that we have had in the past.

And frankly, we have more ideas that we can go to in terms of innovating with Pizza Hut.

I think our bigger challenge is competing in this value environment.

And I — I do think that in the era of increased gas prices, you really have to be on your game.

I think we’re really on our game with Taco Bell and KFC with both the innovation and value front.

I think we’re kind of halfway there with Pizza Hut.

And when you have two national competitors that you are slugging it out with everyday, when you are not on your game, you’re going to slip back.

And our commitment is we’re going to get our game back, and we’re going to win more than we lose in the long term.

And the great news about Yum! is that when you look Yum! in total, we are on our game.

Obviously, in total we are delivering our results, and that’s the power of the portfolio, and that’s the strength that we have.

But I can tell your right now, when I’m talking to the Pizza Hut guys, I’m not talking about power portfolio.

We’re talking about getting all over the consumer and figuring out what we can do to get the business going.

And we don’t like it one iota that we are not competing as effectively as we can with competition.

We know what to do, we just have to do it.

We have turned brands around in the past, and we’ll turn them around in the good — in the future.

And the good news is Yum! doesn’t need to be turned around.

Yum! is doing quite fine.

Thank you very much.

Thanks, David.

Marvin, before we take the next question, I want to just clarify one point we talked about earlier on the U.K.— someone asked about U.K. comps.

For the first quarter, they were down in the 7 - 8% kind of range.

And in Period 4, they were down more like mid-single digits.

And the improvement was pretty much KFC U.K-driven.

Marvin, next question, please.

Our next question comes from the line of Steven Kron with Goldman Sachs.

Great.

Thanks.

Hi, guys.

Hi, Steven.

Just two questions on the U.S.

First, as we think about Taco Bell development and the acceleration there, and as we expect going forward the continued acceleration.

Can you just put some context around maybe unit economics — how those newer units are opening?

Maybe speak to the site selection process and the cost to build there.

And then secondly, absent from your — your remarks as multibranded units, can you talk to us kind of — sort of a progress report here — where we are with that?

Are you happy with the returns you’re seeing there?

Thanks.

First of all on Taco Bell, our recent new-unit openings have performed well, but people should realize most of the development is franchise development.

Overall, our margins are strong, and franchisees only developed with a good financial equation for them.

So we feel good about — that the economics in Taco Bell will continue to support more and more development.

Yes, I think when you — if you look at Taco Bell in total, okay.

Here is what we have on our hands.

You got a brand that’s the second most profitable brand in the United States.

Okay.

Our Company average unit volumes now are about 1. — $1.3 million plus.

Okay.

We have great margins that you would expect with that kind of — of volume.

And we got a brand here, that is only getting more esteem with our customers.

It’s really, I think, one of the hottest brands in the category.

But we only have 5,000 traditional restaurants in the United States, compared with McDonald’s — 1. — they have 14,000 restaurants, now they average $1.9 million in sales.

But we don’t have a breakfast yet at Taco Bell.

And when we look at this business, we — we think we got a great expansion opportunity.

And I think one of the— the big challenges we have is to figure out how to get more franchise growth as we go forward in the future.

And we are working on that very — very diligently.

Now there’s two parts of this — one is taking the power of the stand-alone economics of Taco Bell, and our franchisees are opening up a number of those restaurants.

I don’t have the exact number right off hand.

But the other part of that is that we have, we think, the most dynamic consumer concept in the category when you take two power brands like Taco Bell and KFC and put those together.

The KFC/Taco Bell concept has excellent unit economics.

Excellent volume — average unit volumes.

And we are — we are now pursuing a more dramatic expansion of that concept as — as we go forward.

And we think that will allow us to penetrate both the rural areas where the population doesn’t exist or the urban areas where we really have not opened up Taco Bells in the past.

So we think the K/T is our single biggest sure thing with multibranding.

The other option that we have is KFC — is Taco Bell/Long John Silver’s.

We’re continuing to test that.

But frankly, as we look at the real opportunity — the biggest opportunity we have, when we look at everything we have learned about multibranding, is taking KFC and Taco Bell — that combination and driving that as aggressively as we can.

A couple of other comments on multi-branding.

First of all, we already have over 3,000 multibrand restaurants today.

Sort of think of multibranding in sort of three layers — one is new-unit development.

And to David’s point, we’re concentrating a lot of that on K/Ts and especially — that’s KFCs and Taco Bells — in rural areas.

So we think that’s probably our biggest new-unit opportunity.

The second thing is sort of the sales layer.

And the piece that’s most like that is the delivery for Pizza Hut/WingStreets.

In 2005, we added about 500 units, and we expect to have strong growth in 2006 as we get more franchisees on board with that.

And then the other thing is you sort of have to do renovations and that’s where we have experimented a bit more.

And again, most of those are franchise renovations, and they are — especially on the KFC side, we’ve looked at — we’re now looking again at KFC/Taco Bells, but a lot of those have also been KFC/A&Ws or KFC/Long John Silver’s.

So that’s progressing, but you’re not going to see too of those in new units.

The other combination we feel very good about is KFC/A&Ws.

Our franchisees have had great success opening up them and also converting their assets to KFC/A&Ws.

We have 120 KFC/A&Ws.

About 50 of those do over $1.5 million plus, with very good unit economics.

We have 50 that do $1 million to $1.3 million, and we’re working on our margins.

And we have 20 that we really haven’t done that well with.

But we know when we operate really effectively —the KFC/A&W combination is an outstanding combination that our customers really enjoy.

So we think that this is a big advantage that we have as a company because of our portfolio.

We’re doing everything we can to drive the heck out of our individual brands.

And then we look at the multibranding as an opportunity to bring our customers even more branded variety.

So the strategy is still there.

We’re still working on it and excited about it, and we’ll continue to report our progress.

That’s great.

If I could just ask one quick last — and then I’ll pass — pass the floor.

Sure.

Rick, it seems like the commodity cost environment — at least in the first quarter, surprised you guys a little bit to the upside and was a benefit and also resulted in a higher guidance.

I was under the impression that you were fairly locked in for, at least, the near term.

Is there anything— first of all, am I right about that?

And secondly, is there anything different from a contracting standpoint that you’re doing?

As prices come down, maybe going longer term with some certain contracts when you are in a favorable situation?

I’m going to let Tim, in a second,talk about the chicken contracts, which are longer term, which will limit our potential exposure, both upside and downside in commodities.

But just as a review of the overall — what we said is that — when we started it in December, we said we expected commodity inflation to be less than 1% in 2006.

In the first quarter, as we said, we actually saw deflation and we see that continuing in the second quarter.

So when you add those up year over year, that’s about a $15 to $20 million upside versus prior year, which is about $10 million better than — than our original plan.

And again, as I mentioned before, in the second half, we assume we’re going to be about flat for the balance of the year.

And I will give — let Tim give a little more color on the chicken contracts.

On the commodities for the first quarter, actually, it was over 60% driven by cheese and dairy.

And then — the vast majority — the rest was the meat complex, so to speak, for us.

It was — interestingly it was across all of our big brands: Pizza Hut, Taco Bell and KFC.

So you are talking beef, pork, and chicken were all favorable, including chicken.

Chicken is the one that we’re most locked into from a contract perspective for most of the year.

And it will be deflationary for the year.

So the upside was really in beef and pork — as well as cheese was definitely much more than we thought.

And we’re expecting that to continue into the second quarter.

And then the second half of the year, as Rick mentioned in his speech — we know pretty much chicken.

What we’re not sure about, just because it’s volatile, is beef and cheese, as you have seen in the past.

Based on what our experts are telling us right now, it looks like we’ll be about flattish overall for the second half in entirety all of the commodities.

The only thing that was negative in the first half is — we actually did have about $1 million of inflation from produce.

It is still kind of a mixed picture, but strongly positive, in terms of cheese and meats.

Okay.

Thank you.

Thanks.

Next question, please, Marvin.

Our next question comes from the line of Andy Barish with Banc of America Securities.

Thanks.

And quick follow-up on that commodity picture.

If you guys have off the top of your head the number you have given out in the past, I just don’t have it — on the commodity impact from last year all totaled in the U.S.?

Commodity inflation last year was about $15 million.

And pretty much skewed to the first and second quarters.

The back half of the year was pretty much flat.

Okay.

And the year before that — ‘04 was probably twice that?

No.

No.

It was about $75, $80 million of inflation in ‘04.

Okay.

Thank you very much.

Thanks, Andy.

Next question, please, Marvin.

Our next question comes from the line of Joe Buckley with Bear Stearns.

Thanks, just a couple of quick follow-ups.

Tim, when you talk about the U.K. comps are you talking about Pizza Hut and KFC combined?

Yes, that is the combination of the two brands.

Has Pizza Hut been negative as well?

Or is it all KFC?

Yes, they have both been — actually, in the last year they tracked very closely.

As the year has progressed — this year KFC has actually been showing some signs of improvement.

Pizza Hut has not moved yet in — in the U.K..

Okay.

And then — question on avian flu.

You mentioned U.K. comps being good the last couple of weeks despite the discovery of avian flu in the U.K..

I guess obviously from the China numbers — and what you said avian flu concerns are greatly diminished.

Any sense why that’s happened?

Is it a cumulative educational process.

As the avian flu-news gets older and older and — in terms of people’s familiarity with it?

Well, let me answer that, Joe.

I think — first of all, we have something that’s really great on our side, and that’s the truth.

We know that fully cooked chicken is safe to — to eat.

So the good news is that this— this news is getting out.

And I think — we have successfully been working with government and industry officials to — to ensure that the public is educated about fully cooked chicken being safe to eat.

And of course, we have our own in-store materials that have been prepared to get out that message that we have done in international markets.

We believe that the U.S. government and the press is doing an outstanding job giving a balanced perspective on this.

You might have seen the — the news article on — I think it was NBC this weekend, where we were given the clear opportunity to get the message out that fully cooked chicken is safe.

And Jonathan Blum and our public affairs group, did an outstanding job really talking about the things that we’re doing to ensure that we have — that the message is out there.

So from an overall business perspective, we believe we have weathered the storm, so to speak — I guess you would say very well, as avian flu has moved across the globe.

We have been impacted in some markets more than others.

And we’re—we’re becoming more confident that developed markets, where you have a more sophisticated food and supply chain — markets like the U.K., Australia and the U.S., that — that message that fully cooked chicken is safe to eat is going to get out.

And plus, there’s just a lot more confidence in the overall food chain, period, than there is in — in let’s say markets like Turkey or China.

So as we go forward, two things are making us more confident of a minimal impact; one, was that — is how the U.S. consumers handled the news of mad cow, for example, in the U.S.

That was a big issue, obviously, everyone knows in the U.K..

But in the U.S., consumers handled that in a very balanced perspective.

And the second thing is, is that it looks like, in the U.K., it seemed to be kind of unfazed about — by the news of finding the avian flu there.

And our — KFC U.K. sales are — are holding up just fine.

So I — we remain cautiously optimistic.

I mean no one — no one knows exactly what — what’s going to happen.

But as we look at this the— the good news is the truth is on our side.

And — and we’re fully prepared to handle anything that — that comes up, as it relates to avian flu.

And so we’re — I mean not— if you look back where we were at the investor conference, we know a lot more today than we knew back in November.

And I think our first quarter would say that we can weather pretty significant news storm, and — and do fairly — fairly well.

So we’ll leave it at that.

If I just — to build on that just quickly, I think that we’re getting more confident that in developed markets the world is getting out.

And therefore, again, as David said, we’re optimistic that it’ll have a lot less impact or no impact in those types of markets.

And to your point, Joe, on the less developed markets — what is occurring, when there is a revisit of avian flu, that impact gets diminished.

So for example, Thailand, which has had the most avian-flu news, really is having no impact on our business there by now.

Thank you.

Thank you.

Thanks, Joe.

We have time for one more question, please, Marvin.

Our last question comes from the line of Larry Miller with Prudential.

Hi, thanks.

Just wanted to ask a KFC in the U.S.

You are upgrading the system — the drop-dead date was 2008, if I’m not mistaken.

Right.

Where are you guys, both from the company side and franchise side today?

And I saw some reports recently that some of franchisee closures might be in the 300-ish range.

Is that accurate, as well?

In terms of — you are right, Larry, in terms of 2008 is when the deadline is for upgrading the system.

As we have said, that’s going to — we’ve continually communicated with our system that that’s a hard date.

And what we said is, we are prepared to face some potential closures if it results because of that.

And 300 is a number that I think is a fair number.

We really have no idea — we said 1 to 300 was probably our best guess.

We think more likely there will be more franchisees buying out other franchisees as that time approaches.

We’re about halfway through, in terms of the upgrade, so we have a long way to go between now and 2008.

We think it will be back-end loaded but the activity is starting to pick up now.

We’re well ahead on the the company side, so it’s mostly a franchise issue.

I want to thank you very much for asking that question because it’s a great opportunity to let all of our franchisees, many who are shareholders, know that there’s no wiggle room on the subject.

In every good franchisee worth their salt’s going to get their brand looking good anyway.

Anybody that bails out will be a hell of a lot better off if they do.

And good news is we have a lot of great KFC franchisees — vast majority of them are doing everything that needs to be done.

But we’re excited about having a system that looks as good as our brand.

That’s what we’re really working towards, and I think that will be a big plus for us.

We think that KFC is a great, great brand.

And the more we innovate around what makes us really unique, like — you’ll soon be able to try our famous bowls, which I encourage you to go out and try this summer.

I think that they are going to be just outstanding new product.

But that’s the stuff that we can do that nobody else can do that I think the team is really on to right now.

And we are loving making great-tasting, indulgent food that our customers really love.

I think the future looks really good, especially as we get our assets moving forward.

Okay.

That’s the last question, Tim?

Yes.

Let me wrap this up just by saying we had great first quarter in spite of all the news about avian flu and perception issues in some areas, on that front.

It’s good to have that behind us, so we at least now know more than we did.

The good news: it appears that consumers are getting the message that fully cooked chicken is safe to eat.

We are feeling confident about the year, even though it’s early.

Like I said earlier, don’t get ahead of us.

We give annual guidance — we want to be at least a plus 10% company year after year.

That’s going to make us great.

Right now, we’re saying it’s 11%, and it’s early on in the game.

What we really feel good about is the quality of the earnings that we had in the first quarter, and we expect to continue to see that quality go forward as — as we move ahead.

We’re looking for really great operationally driven performance in the U.S. and around the world.

The U.S. business looks a lot better than it has in the last three years, which we — we told you we thought we had some upside in that area.

It’s nice to see that coming into play.

And we think our China business is — is on it’s way to another great year.

I’m very excited about what I see around the world.

I just came back from a trip, and it’s great to see our business continuing to get better and better.

One of the things that I’m off to right now after this — we always have a town hall where we talk to our people around the globe about how the business is doing — but we’re heading toward Las Vegas.

We’re doing a global marketing summit.

And we’re going to really share best practices and the marketing process we put in place that we think can drive more consistency.

We have a lot of upside, just by getting better and better.

It bothers us that Pizza Hut is down, it bothers us that the U.K. and South Korea is down.

We think if we execute what we know works, we think we can get them all going and that’s what our goal is.

And we’re not going to stop until we get them all going, and I’m going to talk about that tonight and the next three days as we share best practices.

We have the power of the portfolio.

It gives us lots of strength.

We don’t run the business that way.

Every place where we’re down, I guarantee you we’re trying to fix, and we’re going to do it.

So thank you very much and look forward to talking to you next — next quarter.

This concludes today’s conference call.

You may now disconnect.