百勝餐飲集團 (YUM) 2008 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the 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)

At this time, I would like to turn the conference over to Mr.

Tim Jerzyk, Senior Vice President of Investor Relations, and Treasurer.

Thank you, Mr.

Tim Jerzyk, I would now -- please begin your conference.

Thank you, Carrie, good morning, everyone.

Thanks for joining us today.

This call is being recorded and will be available for playback, we are broadcasting the conference via our website at www.yum.com.

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

I 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 last night, and may continue to be used while the call remains in the active portion of the company's website at www.yum.com.

In addition, we would like you to be -- please be aware of three upcoming Yum!

investor events.

Monday and Tuesday, May 5, 6 this year we will host analyst investor conference in our headquarters here in Louisville.

Please notify us as soon as you can if you plan to attend this big event.

Our second quarter earnings release will be Wednesday July 16, after the market close.

And then finally, we wanted to remind you of our China investor event this year in Shanghai, September 22, and 23, a little bit later this year.

If you would plan to attend, we would love to have you make plans now to obtain your official visa.

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.

Now I'll turn the call over to David Novak.

Thank you,Tim.

And good morning, everyone.

As you may have seen from our release last night, we reported outstanding first quarter results both in terms of operating profit and EPS growth.

Our results continue to be driven by great performances from our two big international businesses.

China and Yum!

Restaurant International, which includes our business outside of China, and the United States.

Our high-return, rapid-growth China division has 33% growth in operating profit this growth -- this quarter.

And YRI grew operating profit by 18%.

Importantly, these results were built on top of strong year-ago performances, a testimony of to the strength of each of these businesses.

In the U.S., while we had to weather substantial commodity inflation this quarter, we are make progress and are in the early days of our U.S.

brands transformations.

Same-store sales grew by 3%, reversing last year's decline.

Overall for Q1, before special items, operating profit grew by 13% and EPS by 19%.

Including special items, our EPS grew by 43%.

In our release last night, we took extra care to explain these items so that you could understand our underlying global performance for the quarter.

Any way you look at it, however, our aggregate operating performance was very strong in the first quarter.

I am happy to report that on the strength of this opening quarter, we are confident of continued growth for Yum!

and its shareholders in 2008, which is why we are revising upward our previous 2008 earnings per share guidance to $1.87 or 11% growth, excluding special items.

Reaffirming our annual commitment to deliver EPS growth of at least 10% every year.

This would be our 7th straight year of meeting and exceeding this annual EPS growth commitment, and building on a track record of consistency, we are very proud to report to our shareholders.

We just returned from a regular strategic review of our businesses last week, and I must say I have never been more confident of our businesses and their long-term direction.

From exciting new growth initiatives at YRI to the brand transformations that we are planning in the U.S., let me now go into some more detail.

As we talk about each of our businesses, we will do so in the context of our four key growth strategies.

Number one, build leading brands in China in every significant category; two, drive aggressive international expansion and build strong brands everywhere; three, dramatically improve U.S.

brand positions, consistency and returns; and four, drive industry-leading long-time shareholder and franchisee value.

So we'll start with China, where we are well on our way to building leading brands in every significant category.

Same-store growth of 12% for mainland China was one of the best quarterly performances ever, despite historic snow storms that were widely reported.

At the same time, we continue to strengthen our leadership position with very strong growth of 20%.

Importantly, we expect to reach 3,000 restaurants on the ground in more than 500 cities in this mega market by the end of the year.

This is a phenomenal result and speaks to the power of our superior brand positioning and execution in China.

For KFC, we expect to again add over 380 units in mainland China in 2008, while at the same time driving excellent same-store sales growth and performance.

Our brand measures and returns remain very strong, and we expect KFC to continue to strengthen its QSR leadership position in 2008 through the development of new proteins, delivery and the expansion of our breakfast day part.

KFC's pipeline is definitely full with exciting new product ideas we will announce as the year progresses.

Our leadership position also continues to build for Pizza Hut Casual Dining.

Now with over 360 restaurants and growing rapidly, we are the undisputed leader in mainland China's casual dining category.

We expect to open about 85 new restaurants in 2008, while at the same time expanding our tea-time day part business, and bringing exciting menu innovation to our customers.

Our new growth brand, pizza at home service, continues to perform well.

By year end, we expect to add about 20 new Pizza Hut home service units, bringing our total to about 80.

Home service delivery I have a rapid emerging growth area of the mainland China restaurant industry.

And finally, we continue to make great progress with our forth emerging growth brand, East Dawning, our Chinese fast-food concept.

We are continuing to expand in Shanghai and expect to open three new units in Beijing during 2008 in our quest to make this ultimately China's number one Chinese fast-food brand.

For those of you who are followed our successes over the years in China, you know we have a huge strategic advantage with our stable and experienced management team in Shanghai, our established and state of the art distribution system, our dedicated manufacturing capability, and our large-scale development team.

All of which combine to produce results that are unmatched by anyone in Mainland China.

With that, I would like to take this moment to congratulate Sam Su, President of our China division on his election as Vice-Chairman to our board of directors.

Sam is the pre-eminent pioneer of our booming restaurant category in the world's fastest-growing economy.

He is passionate about China and our China business.

He is doing an outstanding job building leading brands in China in every significant restaurant category, which is our number one growth strategy.

His strong leadership, restaurant know-how and local knowledge has and will continue to deliver break-through results with his sensational team.

Congratulations Sam, and congratulations to everybody in China for the great work that they are doing.

Now, on to YRI, where Graham Allan and his team are driving our strategy of agressive international expansion and building strong brands everywhere.

As I noted earlier, Yum!

Restaurants International had another really good quarter with operating profit growth of 18% driven by 15% growth in system sales.

Importantly, YRI continues to build on strong performances each year and this quarter is another great example of the sustaining growth this business can consistently produce.

The key driver underlying YRI's profit growth is the worldwide development capability of our 700-plus franchisees.

We opened 158 new restaurants in the first quarter which is ahead of last year's pace, and we're on track for another new unit development record in 2008.

YRI same-store sales growth in Q1 was impressive with 5% growth lapping a very strong 7% growth a year ago.

This performance is especially remarkable given the pace of our new unit development and speaks to our strong competitive positioning, led by our YRI teams worldwide.

A key driver of this performance is continued strong performance in our franchise business units around the globe, including the Middle East, Asia, and South Africa.

For the long term, we also continue to develop in emerging key markets like India, Russia, and even Vietnam as we leverage our core strategic advantage and capability to develop global markets.

Matter of fact, I visited Vietnam last month, and this market has a very similar profile to our China business with just only 85 million people.

It is early days there and yet, we are making very good progress with KFC, we have now 40 KFCs and we're also beginning to open up Pizza Huts.

Just in the short time I was there, just a couple of days, you could sense the excitement our team members and our customers have for our brands.

Looking longer term at the base business, last week, at our YRI strategy review, the team took us through their initiatives to develop permanent sales layers for KFC around the world.

For example, we are actively testing global solutions for new beverages in Australia, breakfast in the UK and Asia, and new proteins in Latin America and the Middle East.

Specifically, we're targeting fish.

We are excited about these opportunities and what they can do to build an even bigger KFC brand for YRI.

It also shows our innovation capability as we have different parts of the world pioneering new ways that we can take our brands to higher heights.

Given the scope of our global opportunities, we are not satisfied or stopping there.

The YRI team remains committed to developing Taco Bell in to our third global mega brand over the long term based on successful expansion in Guatemala, Costa Rica and the Philippines.

For 2008, and 2009, we will expand our test beyond to Mexico, Dubai, India and Spain.

To summarize, we are confident YRI will have another great year in 2008, likely exceeding our at least 5% growth target for system sales on a local currency basis, and well over 750 new restaurant openings, and drive 10% operating profit growth.

Stay tuned for more great news from YRI.

In our U.S.

business, first quarter system same-store sales increased by 3%, reversing last year's decline.

Operating profit was down 5%, primarily as a result of substantial commodity inflation.

Q1 was a challenging start to the year on the cost side, yet we are continuing to strive to achieve our 5% profit growth target for the full year.

We are very focused on the long-term work that needs to be done to accomplish the U.S.

brand transformation strategy we have set in motion.

We are confident we are taking the right steps to lead us to stronger brand positioning, higher returns and consistent growth performance to unlock the value that's inherent in our 18,000 U.S.

traditional stores, which is -- which all of this happens to be our major strategy, our third-key strategy for Yum!.

Now let's briefly reviews the progress we have made thus far in each of our leading brands.

At Taco Bell, the good news is we are building strong momentum in early 2008, even with limited news thus far.

We will begin to see the introduction of new sales layer ideas in the second quarter with the launch of Frutista Freeze, a new beverage line for Taco Bell.

In addition, we will simultaneously launch what we believe will be an enhancement to our already strong QSR value position with a new successfully tested value menu called Why Pay More.

What makes all of this exciting is that will be utilizing a new multi-layer marketing approach through the year to drive trial and build awareness on the new ideas while we maintain multiple messages behind key products and layers throughout the year.

As an example, as we look ahead, Taco Bell advertising will multiple media messages supporting the launch of Frutista Freeze and our new Why Pay More value initiative, while also continuing to build awareness of Fresco, our great taste, less fat and lower calories line of products through a combination of print and online advertising.

So in summary, we are regaining our edge at Taco Bell and expect to achieve very good results in 2008, as we launch two completely new menu platforms in the second quarter.

Beverages and our Why Pay More value proposition, which we expect be build momentum into the second half of the year.

To update you on Pizza Hut, we are in the process of a major reinvention of the brand and delivery category as we driving aggressively against the vision of our Pizza Hut brand providing America with pizza, pasta and chicken.

We just successfully launched an exciting new platform called Tuscany Pastas.

We launched with two pasta options, Cheesy Chicken Alfredo and Meaty Marinara as our two core products, both at a great value for families looking for an alternative, yet affordable break from weekday kitchen duty.

It is early, but we are optimistic this will be an important sales layer for Pizza Hut.

Combined with the successful earlier launch of Pizza Mia, which is targeted to the heart of the value category in pizza, we believe we now have two very good options for our customers when they are seeking great value alternatives to every day dinner solutions.

We will be adding more pasta variety later this year to along with our category leading pizza innovation in our new everyday core value offering with Pizza Mia.

Additionally, we're beginning to gain solid momentum with the roll out WingStreet conversions which provides a great brand of line of flavored chicken wings and protein variety to our menu.

We have reached an agreement with our franchisees to dramatically expand WingStreet in to our existing Pizza Huts, and by the end of 2009, we will be in the position to advertise America's largest wing chain on national television.

We now have more than 1,200 U.S.

Pizza Hut locations, which have add WingStreet products to their menu.

In summary for Pizza Hut, we have introduced two new sales layers, every day value with our new Pizza Mia and home meal replacement variety with our new line of Tuscany pastas and we continue the expansion into our Pizza Hut stores with WingStreet.

By adding and building these sales layers, we remain confident of our ability to grow our Pizza Hut brand in the U.S.

within a very challenging category and we're confident in the actions we're taking to transform Pizza Hut into a home meal replacement business.

At KFC, we are continuing to work towards our goal of offering a new range of grilled and portable products any way you want it along side our traditional, delicious fried chicken.

We're in the very early stages of this work.

The key event will be the introduction of our new grilled chicken product in the first half of 2009.

We will be installing new ovens and back of the house equipment beginning later this year, which will enable our new vision for the KFC U.S.

business.

We are excited about the new options will be provide our customers going in to 2009.

As an initial step into expanding our portability options, we just recently introduced a great tasting, value priced toasted chicken wrap, and we will follow this up with the introduction of another grilled portable product later in the year to begin the long-term process of building a much broader offering for lunch customers in contemporizing the brand.

In summary, we are not as far along with our transformational efforts at KFC as we are at Taco Bell and Pizza Hut.

You will likely not see national launches of our sales layer building ideas during 2008.

We with laying an important long-term foundation for the future success of KFC U.S., have significant testing underway right now, and expect to deliver better results in 2009 in the United States for the KFC brand.

To summarize, the U.S.

business, given the macro environment and an economy we describe as value-driven for 2008, Taco Bell is clearly our best positioned U.S.

brand with its number one value rating in the industry and it's entry level QSR pricing for individual eating occasions.

KFC and Pizza Hut are both more skewed to dinner occasions and higher guest checks.

As a result, they are more susceptible to the pressures currently impacting consumer discretionary spending.

However, we believe we are faring well given the environment and we expect to meet our full-year target for U.S.

sales growth.

More importantly, however, we are make steady progress in developing a broader range of customer options, which we believe will strengthen our brand positioning, and lead to more consistent growth performance at each one of our brands.

Our forth and final growth strategy is to drive industry-leading, long-term shareholder and franchisee value.

The good news is that we are already a leader in returns, not only among restaurant companies, but among large cap global consumer companies as well.

On an after-tax basis, our return on invested capital is 18%.

So we're starting from a position of real strength.

The fact is, that Yum!

Brands is an incredible cash machine, with each of our three businesses generating free cash flow, effectively funding their own capital investments.

As this capital is deployed to higher-return opportunities, for example, our new restaurants in China, where the cash payback has been only two years, we expect our total returns to remain strong.

These returns will improve further as we continue to refranchise restaurants in the U.S., and YRI.

Along these lines, it is interesting to note that we successfully divested our minority interest in the KFC Japan joint venture, which has produced over $100 million in cash proceeds and gains as well, as a 100% franchise operation in Japan, which was our long-term objective and certainly improves our returns.

With our strong cash flow and balance sheet, I'm also pleased to report that we completed nearly $1 billion of share repurchases in the first quarter, when we had a great opportunity to add shareholder value given the market.

This new quarterly record demonstrates our commitment to shareholder payouts, adding shareholder value whenever we can, and the confidence we have in the growth potential and the value of our company.

We're proud of the fact that we are one of the few companies that can make significant capital investments year after year and make great investments in large-scale share buybacks while adding shareholder value and pay a meaningful dividend and grow EPS in the double-digit range.

Our commitment is to continue this tradition of rewarding our shareholders with superior returns.

For more on our financial performance and outlook, I'll turn it over to Rick Carucci, our Chief Financial Officer.

Rick?

Thank you, David, and good morning, everyone.

In this section of the call, I'm going to comment on three items.

One, Yum!'s first quarter results; two, an update on U.S.

refranchising program; and three, our current year outlook.

Starting with our first quarter results, I would like to highlight three foundations of Yum!'s financial story, our consistency of results, our global growth, and our strong cash generation.

First, our first quarter results demonstrate that we are well on our way for the seventh straight year to meeting our commitment to deliver EPS growth of at least 10%.

As David mentioned, we are very proud of this consistent financial performance.

Second, we continue to expand our business around the world, opening 253 new units in Q1 outside the U.S.

This early pace of development gives us confidence that we will again exceed our annual international development target of at least 1000 new units.

Consistent and significant unit growth continues to be a critical component of our global growth picture.

And third, we returned a record $1.1 billion to our shareholders in the first quarter.

Share repurchases alone were nearly 1 billion.

The average price of share repurchases in the first quarter was $35.39, which we believe has created significant value for our shareholders.

We are well on our way towards repurchasing our target of $4 billion of stock in 2008 and 2009 combined.

This will reduce our share count by approximately 20% from 2007 levels.

Now I would like to comment on the first quarter results of our key businesses.

First, our China division had another impressive quarter.

Top-line growth is led by exceptionally strong same store sales growth of 12% in mainland China, and impressive new unit growth.

In fact, in mainland China alone, we opened 88 new units, which is ahead of last year's record pace for the same time period.

While restaurant margins declined by 1.6 points from prior year due to unusually high commodity inflation, they were maintained at a very healthy 21.3% This lead to 23% constant currency profit growth lapping comparable growth of 26% last year.

This profit growth was achieved while also increasing our P&L investments in future growth engines like Pizza Hut Home Service and East Dawning.

Additionally, as highlighted in our earnings release, we realized a first quarter profit benefit of $8 million due to favorable foreign currency conversion.

These China results underscore the tremendously strong competitive position we enjoy in this rapidly expanding market.

Yum!

Restaurants International delivered another strong quarter.

Profits were up 11% on a constant currency basis, lapping 23% growth in 2007.

Like China, YRI generated strong top-line results through 5% same-store sales growth and through opening 158 restaurants in the quarter.

Given the strong development start in China and YRI, it is very possible that Yum!

will exceed the record for new unit openings set last year.

YRI results are even more impressive when you consider the significant impact of losing our value-added tax exemption in Mexico.

Absent this impact, YRI would have delivered profit growth of approximately 15% on a constant currency basis.

Additionally, due to favorable impact of foreign currency conversion, we realized a profit upside of $7 million in the quarter.

Ultimately, it is our established presence in a multitude of growing markets, combined with our franchise business model that makes YRI a unique part of Yum!'s overall growth story.

U.S.

results were significantly challenged by cost inflation as David noted.

Our same-store sales growth of 3% in the first quarter was in line with our full-year targets.

However, this level of sales could not offset the impact of record-level commodity inflation, which alone eroded restaurant margins by 2.5 points in the quarter.

Commodity inflation, combined with the lap of hurricane Katrina-related insurance benefits from last year, led to a profit decline of 5% in quarter one.

We expect dramatically better results in the back half of the year as pricing actions catch up with cost inflation.

And as David noted, we continue to have confidence in the steps our brands are taking in near term to transform our U.S.

business for the long term.

As outlined in the earnings release, we have segmented our EPS reporting into reported EPS and EPS excluding special items.

We want to make clear, that EPS excluding special items is a better indication of Yum!'s underlying performance.

These special items include significant U.S.

refranchising gains and losses, cost of transformational investments to reposition our brands with new sales layers and cost of restructuring our business.

In the first quarter, the category of special items included $32 million of U.S.

refranchising pre-tax losses and charges related to U.S.

restructuring, partially offsetting a $1 million pre-tax gain from the sale of our minority interest in KFC Japan.

Although clearly one time in nature, this gain unlocked substantial value for our company, and was a positive example of the financial discipline we use in making ownership decisions.

When we exclude the resulting EPS -- $0.08 of EPS net gain from our reported EPS of $0.50, we arrive at adjusted EPS of $0.42 or 19% growth on a comparable basis versus last year.

Now for a brief update of U.S.

refranchising.

We announced in December that we intend to reduce our U.S.

ownership to potentially reach below 10% by the end of 2010.

First quarter refranchising was slow and recent tightening in the credit markets made challenge at 2008 pace of this activity.

However, we have a significant pipeline of deals and expect future quarter's activity to be much stronger than we experienced in the first quarter.

Although it is difficult to predict the exact timing of refranchising, we expect to sell about 200 units in the second quarter and to refranchise at least 500 units during 2008.

Our strategy continues to be to find the best buyers and to realize the best value for our assets.

And we are under no pressure to compromise either one of these objectives.

This has always been a three-year program and we are still on track to achieve our goals.

These goals include positive financial benefits to U.S.

restaurant margin, operating margin, and Yum!

ROIC, as well as less demand on capital expenditures from the U.S.

business.

With the first quarter now completed, let's quickly cover our 2008 outlook.

As previously disclosed, quarterly earning will be volatile due to timing of special items and our quarterly tax rate.

That said, we expect our overall business to deliver solid operating performance in every quarter this year.

Starting with the second quarter, I want to point out three things.

First, we expect within the special items category, a net loss of $0.01 to $0.03 per share due to U.S.

restructuring charges and refranchising losses.

Second, our quarterly tax rate is likely to be significantly higher than the 21.5% we reported in Q2 of 2007.

Third, our U.S.

insurance expenses are expected to be significantly unfavorable to 2007 as we lap upsides from last year.

We expect the year-over-year negative impact in the second quarter to be about $20 million.

These items will combine to negatively impact our reported Q2 earnings comparison versus prior year.

As usual, we explain the impact of key items in our Q2 earnings release in order to clarify the underlying performance of our business.

As David mentioned, on the back of a strong first quarter, we have raised our full-year EPS growth forecast to $1.93 on a reported basis, or $1.87 when we exclude special items.

This forecast assumes the following.

Over performance by our China and YRI divisions when compared to their long-term operating targets of 20% and 10%, respectively.

This over performance reflects both our very strong year-to-date results as well as benefits from foreign currency translation.

Potential for slight under performance by our U.S.

business when compared to its long-term operated profit growth target of 5%, based on weakness in our quarter one operating performance.

We expect U.S.

profit performance to improve in the second half of the year, as our pricing actions catch up with commodity inflation.

To wrap up, we are very pleased with our overall first quarter results, and we expect 2008 to be another successful financial year for our shareholders, generating consistent financial performance, impressive global growth, and strong cash flow.

Back to you, David.

.

kay, thank you very much, Rick.

So, you can see, I think, from our comments that we have gotten off to a strong start in 2008.

By the way, we actually had a $100 million gain in Japan, not a $1 million gain, as Rick was going through the numbers there.

Small, little detail there.

But anyway, we're truly in a unique position as a global growth company to be able to turn in the kind of results that we have generated in a very challenging environment.

With though huge market opportunities in China and the sustaining growth of YRI's huge franchise speed base, we're able to weather difficult storms -- difficult storms and continually demonstrate the power of our portfolio.

The U.S.

is clearly our most competitive market and our biggest opportunity to improve performance.

Over time, having a portfolio of three big leading brands in the U.S.

has provided a good deal of stability to our U.S.

profit and cash flow performance, and we're taking action to make it a stronger growth contributor to supplement our powerful global business as we go forward.

With all of that said, you can expect 2008 that Yum!

Brands will once again differentiate itself as not your ordinary restaurant company, and I'm particularly pleased that we will once again exceed our at least 10% EPS earnings target.

With that, we'll open it up for any questions that you may have.

(OPERATOR INSTRUCTIONS) And your first question comes from Joe Buckley with Bear Stearns.

Thank you, good morning.

Good morning, Joe.

Question on the KFC Japan transaction.

Not only $100 million gain, but what income statement items changed as a result of that?

I think the release mentions and the 10-K mentions the equity income number goes down, but your franchise revenue goes up, and net-net is that a year-over-year basis in the first quarter benefit from that transaction in terms of the operating income numbers at YRI?

Joe, this is Tim Jerzyk.

Actually the primary impact to the P&L is the loss of the minority income -- our portion of the income from the overall business that we reported in other income within the YRI P&L.

That's -- it's a -- it was income, but it's a relatively minor amount of money.

So that's gone.

So in terms of operating profit, there is a small loss from that line item.

The franchise side stays the same.

The Japanese business pays royalties as a franchise business as it did before.

Okay.

And then question on China.

Same-store sales performance is very, very strong again, and just curious your perspective on it.

How much of that is price?

Do you think you are gaining share because your prices are going up less than overall food cost inflation?

And how do you think about it as showing some aspects of a boom-like environment?

And whenever I say boom, I always think bust, so, just worried about the potential risk going down the road if that's the case.

Well Joe, Clearly the economy in China is extremely strong, and we're benefiting from that in our strong position there.

Regarding inflation, again, we have had more inflation than most because of the chicken costs that we have talked about historically.

Those are continuing at high levels in 2008, at least through September this year.

We took pricing last year, and -- for a full-year basis around 7%, 8% range.

And we took modest pricing the beginning, sort of -- about a month or so ago.

Having said that, those prices combined are less than the commodity inflation that's being caused by chickens, so that's why our margins are down a little bit, and obviously, the transaction growth that we have been getting has been able to offset that and still allow us to exceed our profit picture.

Regarding the balance of the economy going forward, again, not an economist, but I would say that the China track record has been pretty consistent over not just for a few years, but a ten year period of growing double-digit economic growth and I personally expect that to continue.

I think I read something yesterday, Joe, you see all these statistics, but there's now more internet users in China than in the United States.

I think 212 million.

And we only have now, we're going to be 3,000 restaurants, so, we've got 18,000 in the U.S.

So there's plenty of runway for us in terms of opening up a lot more restaurants with an economy that's quickly getting to be as large as the U.S.'s.

And then, I think the other think that is interesting, we're really in early days in developing the concept.

We continually talk about our China business to be similar to what the McDonald's business is here in the U.S., where they have 14,000 units.

But right now, breakfast is only 5% to 6% of our mix.

We're also just expanding home delivery at KFC, which we can do, because drive through is not a big deal in China, because of just the density of the locations.

So we're having great success with adding home delivery.

As the automobile market does develop, we are adding drives through, and that will be another opportunity for us as we go forward in those types of locations.

But, when we look at the growth that we're having, the economy, obviously growing at least 10% has been a big driver for everybody there has that has a strong franchise.

But the think that's really exciting for us is just the brand dynamics that we have for KFC are so powerful, and that we are getting that young consumer, not just families and kids, but we're getting that 16 to 24 young adult, and that group is getting more and more disposable income, and that's only going to get better as we go down the road, so, yes, we don't expect every quarter to be like what we just had in China, and every year to be a boom year, but like I always say, we're going to be very happy that we're there, okay?

And with the kind of presence that we have.

And Pizza Hut, same thing.

Pizza Hut, we've got -- we're having great success with Pizza Hut, we're expanding the day part there.

We created a tea time there, which not only gets us in to desserts and teas, but also we're building a significant coffee business, and we actually have a competitive advantage versus Starbucks because our environment and experience there is actually superior.

So, we think we're well positioned there to take advantage of the growth in that category.

And obviously, we're working hard to development Pizza Hut Home Service and East Dawning.

So, I think we have got enough fires -- enough irons in the fire to give us some pretty good optimism that while we may not have the kind of robust growth that we have going on right now, the booms are becoming less and less likely -- or the busts are becoming less and less likely.

I appreciate that a lot.

Just one more question, the 12% same-store sales growth, how would they break down, then, between check and traffic?

It was -- it will be in the Q the final details, Joe, but roughly, pricing, I believe was in the seven-ish kind of range, mix was like two or three points on top of that, and the rest was transaction growth.

Thank you.

Next question, please?

Your next question comes from David Palmer with UBS.

Thanks.

It appears that Taco Bell was really the horse that drove comps in 1Q, and is it really the basic view as you look through '08 that the same-store sales growth from that chain is really going to continue to drive your overall blended number?

And that these menu introductions, the beverages and value-oriented innovation are going to basically offset the tougher comparisons that you have for the balance of the year for Taco Bell?

I think, first of all, we expect Taco Bell to have a very strong year as we have talked about.

We're also optimistic about what is going on with both Pizza Hut and KFC.

Our goal is to get all of them going, and that's really what our focus is and where we're heading.

And I think that, as we pointed out in the comments, this is a challenging environment right now in the U.S., it's very value-driven economy, and what we're doing is, we're taking very active steps to get ourselves well positioned there on two fronts, making sure we have value propositions that are better than they have ever been in each one of our brands and also leveraging the assets.

And the thing that I'm most excited about that we have going on are the things that -- like this upcoming launch of Frutista beverages at Taco Bell, that gets us into an incremental occasion with frozen beverages and we have got an exciting long-term vision to really get after that as we go forward.

The other thing at Taco Bell that we feel good about is, we're strengthening our every day value proposition, where we already number one in the industry, but we will be launching this Why Pay More Menu that we think gives us the best amount of food for the money offering that there is in the industry and you'll get to test that for yourself when it is launched within the next month.

So, yes, you are right and we do expect Taco Bell to carry a lot of the load this year, and we also recognize that KFC and Pizza Hut are in tougher markets right now.

Because Taco Bell is driven primary from that low-end, individual eater transaction, the guest check is a lot lower, whereas KFC and Pizza Hut are in the -- more in the dinner occasion, which, as you know, is under much more pressure with the consumer's discretionary spending.

But having said that, I would like all of you on the call to go out and try our new pastas.

Because we just launched Tuscany pastas which are being very well received and this is all along our -- what I talked about at the analyst meeting, we're going to start leveraging the brand, leveraging our asset.

We have now got a new alternative meal that we think is going to help stimulate Pizza Hut's sales and profits,and also early-week volumes, because mom is really looking for another -- mom and dad are looking for another home meal replacement option, and we have got one with pasta and with originally these two items that we just launched, and there will be more coming down the path, and we have got chicken.

Chicken is really, really beginning to take off at Pizza Hut.

I talked to our Pizza Hut franchisees, they are excited about WingStreet now and we're going to make that a national brand.

So Pizza Hut is being transformed, not just pizza, it's pizza, pasta, and chicken.

And then KFC, I think to your comments David, has the most challenging year of all this year, but we are doing a lot of things to set up 2009 to be a strong year for us as we get ready to launch Kentucky grilled chicken, get our portable meal platform -- or portable item platform more established.

This -- the launch of the toasted wrap at $1.29 was the beginning of that, but we're developing a number of products that will go into that stable that will help us get more of the lunch occasion as we get better and better at dinner by having non-fried.

And in fact, we think having chicken any way you want it, fried and non-fried, will really give us a longer-term growth opportunity at KFC that people can't see right now, and I understand that.

So, I'm very enthused that what I talked about in October -- or excuse me, in December at the analysts' meeting, in terms of the potential we have to unlock the value in the U.S.

business is -- the brand transformation strategy is on track, and I think you'll see more and more evidence of that as we go forward.

But this year, make no mistake about it, China and YRI are going to be the big growth drivers of our company, but that's been true for the past few years.

Thanks.

Leave it there.

Thanks, Dave.

Thanks, David, next question, please?

Your next question comes from Jeffrey Bernstein with Lehman Brothers.

Great, thank you.

Actually, just a couple of follow up questions.

First, you're talking about the U.S.

comps turning positive, just wondering if you can give any color on either trends by brand or sequential throughout the quarter, perhaps regional discussion on strength and weakness, and then more broadly speaking, it seems like despite the comp lift, obviously, the commodity cost pressures hurt the margins.

Just wondering what type of lifts you think you might need to maintain the margins, perhaps what the margin outlook for '08.

I know you mentioned some pricing action in the second half of '08, just looking for some detail on that front.

Thanks.

Yes, Jeffrey, thanks, we're probably not going to be able to give you any more on the brand sales trends other than what David already talked about.

But, we're excited about the new layers that are coming, that David highlighted at various points but we have Frutista Freeze and Why Pay More coming at Taco Bell.

At Pizza Hut we have already done the Pizza Mia and the Tuscany pastas, which are the biggest sales layer for 2008 there.

And the KFC layer, which is the big idea, it will come in early in '09.

Regarding, though, the commodity question and the pricing, et cetera.

We got a little bit behind on the commodity inflation in 2008.

When we had our analysts' meeting in December, we thought we were going to have about 4% or so commodity inflation in 2008.

On top of it, 2007 had had a significant amount of commodity inflation.

That number now is closer to 6% to 7% in the U.S.

In terms of our pricing, we took pricing at various times in 2007.

In 2008, the main points that we took pricing were in February, and in late -- and we expect to take pricing in late May, so we got, like I said, sort of behind on inflation in the first quarter, and then we'll catch up by the second half of any year.

The other thing we have going on the commodities side is that the commodities started spiking in second half of 2007.

So the lap between 2008 and 2007 on the commodities side is a little easier in the back half of the year.

To put some dollars around that,, as an example, one with the commodity inflation -- let me talk about, I'll start with food cost inflation and then talk about total inflation.

Food cost inflation in the first half of the year, we expect on a year-over-year basis to be about $25 million per quarter in the U.S.

In the second half of the year, because of the spike we had in 2007 back half, we expect that number to be about $16 million per quarter.

So if you add that up, that's $82 million of food inflation for the year, which is between 6% and 7% for us.

We also have wage inflation of about 3% and other inflation around 2%.

So when you add that up, our total inflation rate for the year is a little over 4%.

On the pricing side, we were behind inflation in the first quarter, we expect to be largely caught up in the second quarter, and then we expect to be slightly ahead by the second half of the year.

Great.

And actually, just one other question.

You mentioned the refranchising efforts, just wondering if we can get any additional retail on that front.

I know you mentioned, obviously, a more challenging credit environment leading to the potentially part of the slowdown in 1Q.

It seems like everyone in the industry is focused on a very similar refranchising initiative.Just want to make sure as you guys look at this -- I know you said you were in no rush, but it would seem like selling the at this point, your brands probably aren't doing as well as you would like.

I just wondering if you could give us some color in terms of franchise desire, whether credit availability is really having an impact in terms of your negotiations thus far?

Thanks.

Sure, Jeffrey.

As I mentioned in the speech, we are confident that we are still reach our goal of potentially less than 10% by the end of 2010.

Having said that, let me add a little color commentary.

The credit situation is having an impact.

It is related to though, the type of transaction we're trying to do.

The smallest impact has been to the relatively small deals, especially to our existing franchisees.

These franchisees have generally built significant equity in their businesses and they have establishing banking relationships.

So those are pretty much proceeding as we expected.

The more challenges transactions right now are the higher price and larger deals.

Is where the current level of equity being required by the lenders has sometimes been an obstacle.

We didn't expect that when we started the process because some of these deals are high-performing restaurants in desirable markets.

So, based on the current environment, we may shift some of our activity to lower-priced deals, for the balance of the year, but again, I want to emphasize our refranchising strategy is to find the very best long-term partners to run the restaurant.

And we're well on our way towards achieving that.

We think we have a floor, sort of, in 2008 of about 500 units, which is lower than what we wanted.

We were hoping more in the 750 to 800 range.

We're still going to strive to do that.

But this is a three-year program, we're still on track, and we're stilling forward to the financial benefits of better margins and returns.

Great.

Thank you very much.

Thanks, Jeff.

Next question, please.

Your next question comes from Jason West with Deutsche Bank.

Yes, thanks.

Just one clarification on the income statement.

I guess it looked like the net interest expense was down a little bit sequentially, although the net debt was up quite a bit from year end.

Just wondering if there was anything in that line item that would have caused the interest experience to be lower than expected.

Jeff, no, there really wasn't anything in particular.

The only -- from a run rate perspective, just keep in mind the fourth quarter has four periods, Q1 had three periods.

That would be the only difference.

And you would have had the full quarter impact in Q1of the $1.2 billion of debt that we added last October.

Because that was into the fourth quarter.

So now you have a full quarter impact of that.

And we did add some debt during the first quarter as we did the $1 billion -- $1 billion in buybacks using our revolver.

So overall, the run rate actually should have moved up slightly from Q4 because of those factors.

But keep in mind, again, like I said, Q1 is a three-period quarter, and Q4 is a four-period quarter.

That would be the big difference.

Okay.

That might explain it.

And one other question, on the China business, it looks like you guys consolidated a group of restaurants there.

If you could just talk about what that was, and sort of the reasons behind that decision, and the impact on the profit?

I guess the release stated about $1 million on the operating profit, but some of the numbers didn't seem to add up there in terms of the sales versus expenses.

Well, let me start with the logic piece.

The piece that we ended up consolidating was a joint venture in Beijing of which we're a 70% owner and we made the judgement at the end of the year that we should consolidate that, just based on the actions that have occurred, including us being able to control some of the people decisions.

So that was an accounting judgment made at year-end 2007, and applies for 2008, and obviously, that impacts the normal lines that you would expect with revenue probably being the biggest one.

I'm not sure what you're -- which item you are referring to in terms of the item you don't know -- you don't understand the math behind.

I'll follow up with Tim on that one.

Okay.

Keep in mind there is detail in the China P&L around the specific impacts.

But, yeah, give me a call on that.

Some of that could just be rounding differences, just a small, small business.

Okay?

Thanks.

Next question, please?

Your next question comes from John Ivankoe with J.P.

Morgan.

Thanks, a couple of questions, if I may.

The first -- there seems to be a lot of discussion in the market about China.

Not only there very strong top line growth, but some of the inflationary pressures that they've seen might be permanent in terms of food, in terms of labor, and perhaps in terms of rent.

So could you philosophically discuss your desire to protect restaurant-level margins going forward, and whether, we should count on you using pricing outside of the big spikes to maintain margins at the store level?

Sure, John.

First of all, if you look at what has happened over time with costs in China, and then I'll give you my assessment on a go-forward basis.

(inaudible) over time is labor has gone up for quite a while in China, and it was a higher level than previous levels, sort of hitting the mid part of 2007, and we expect that into 2008 as well.

Over time commodities for us have actually come down in China as we grew our system from hundreds of units to thousands of units.

Now, we don't expect the rate of that decline to continue going forward, but I also don't expect the food inflation we had in 2007, 2008 to continue going forward, personally.

China continues to grow infrastructure as a country building better roads, better transportation, et cetera.

The suppliers on the food side are getting more efficient.

So I don't believe that inflation on the food side is permanent in China for what we're facing.

I do think wages will continue to go up, and when you look at the math, we will take modest pricing increases to cover that, and we expect to do that.

The market so far -- I was very pleased with how the market reacted to the high price increase we took in 2007.

We have had record transaction growth since then.

So we feel very good about the ability of our brand to price with our inflation costs in the China market, given the positioning e team has done a great job of building over the years.

And out -- let me maybe just reposition the question a little bit, outside of the big spikes in commodities that we have seen over the last, I guess four quarters or so, should we expect margins to be stable, at least partially explained by pricing and other types of growth in China as you discussed?

That is my assumption.

Okay.

My assumption is that we will be able to maintain margins.

Okay.

And secondly, I just want to get a clarification, we talked about commodities being a $25 million detriment to U.S.

operating profit.

That is a very big swing relative to the operating profit that you reported of $157 million, and it looks like your food and paper would have been actually down 110 basis points if we were to have backed that out.

So is that -- kind of assuming that you are running the pricing that you are running with no commodities?

Or is there something else that is happening there, perhaps store-level management, or a brand mix they should be sensitive to?

I don't believe there's anything in particular on the mix side, John.

But basically, what you are talking about is the other offset would be pricing.

Okay.

So that -- so that assumes that you took the pricing that you were going to take, but commodities were in fact -- I guess zero growth year-over-year?

Yes, we took pricing, like I said, at various times throughout 2007, and we took some more pricing in February.

So we had a partial quarter of pricing in 2008.

Okay.

Alright.

I understand that.

Thank you.

Thanks, John.

Next question, please, Carrie?

Your next question comes from Steven Kron with Goldman Sachs.

Thanks, one follow up, and then one question.

Rick, just going back to the U.S.

margins for a second, can you just -- it seems as though commodities caught you guys a little bit by surprise, and can you maybe just comment a little bit on the visibility you have going forward from a contracting standpoint?

How should we be thinking about that?

I think earlier you said something about September.

Can you talk to us about the visibility here?

Are you talking about U.S.

or global?

U.S.

Sorry.

September was China --

Okay.

So, on the U.S.

side, we did get behind on the commodities side.

We did expect, as I mentioned before, 5% -- 4% to 5% for the year, and now it's more like 6% to 7%.

So that's a fairly significant increase.

And we were -- we're always hedged -- I'll talk about that in a little bit -- for a fair chunk of it.

We're probably a little less hedged than normal going in to 2008, just because we're at highs prices already, and franchisees are generally reluctant to hedge at very high prices.

So we had a little less hedging than normal.

From where we sit today, we are now largely hedged through the balance of this year.

So, most of our key items are hedged.

The exceptions to that are cheese, which is still at a high level, and some of the flour, wheat for flour products.

Having said that, I don't expect a lot of risk in those two for the balance of the year versus what our assumptions were that we talked about.

Okay.

And then a question on Taco Bell.

David, the new -- I guess, Why Pay More value menu, can you drill down a little bit deeper.

Clearly, this is a big initiative for "maybe the horse" of 2008 for you guys in the U.S.

But, can you talk about how long you have tested this, what those results showed and what is value as a percentage mix currently at Taco Bell, and do you feel as though this is an area where maybe you have lost some market share over the past year or two?

Well, last year we had a tough year for some obvious reasons with the food safety issue that we had.

I think the -- first of all, we tested this program.

We put it in -- I think it was three markets, and we did it in -- over the last five months, and we really went after this very hard.

We did a lot of consumer testing, concept testing, and we did market testing.

And we don't really -- we would not expand a national value initiative that we didn't have the sense that it was going to grow sales transactions and profits, so -- versus the control situation.

So, that's all I can really say, and I really would rather wait until next quarter to tell you more about the value menu, because we don't like to tell everybody what we're doing in this area, but we just think we're going to be much more competitive, which is what we need to do.

As far as breaking out the Taco Bell value menu, I think the great thing about Taco Bell, the brand is value.

Okay?

There's all kinds of value.

We've got it at the high end and the low end, but people are constantly amazed at how much food you get and how little you have to pay, and how many items you can get for the amount of money.

And in this environment, there's no one that can really top what we have to offer.

I would look at this as the Why Pay More as us taking a proactive measure to strengthen our already number one value position.

Okay.

And then just lastly on the YRI business, any geographic outliers in that same-store sales of plus 5% from your core regions?

Actually, the strength in YRI continues to be very broad based.

Probably the few weak areas are Canada, which is 100% franchise business, it is modestly negative.

Our Pizza Hut UK business is still working on making improvements there.

We're flat to down slightly.

And Japan's been modestly soft.

Other than that, everything is ranging, anything from darn good to really good -- really great across the rest of the world.

We have got examples like the Middle East, where we're experiencing double-digit growth in comps on top of double-digit growth in units on the high end, to single -- high single-digit growth in like Asia, and with comps with comparable unit growth.

So the vast majority of the YRI business is doing really well.

Okay.

Thanks.

Thanks, Steven, next question, please?

Your next question comes from Rachael Rothman with Merrill Lynch.

Hey, good morning, guys.

Can you talk a little bit about -- without getting in to specifics around the same-store sales, of course, but about how successful you feel this shift to national advertising has been for Pizza Hut and KFC, and maybe to the extent to which that has been ramped during the first quarter?

I think you are referring to the fact that we had local dollars, local media dollars shifted to national network media.

Just from a pure efficiency perspective, this is increasing our rating points dramatically, and I just think we're a lot stronger off because of that, because we're able to get multiple messages across.

One of the things we'll be doing now, like, for example, at Pizza Hut, is that we have got -- we're advertising both pizza and pasta, okay?

At Taco Bell, we'll be advertising three layers this summer.

We'll be doing the value, new product news, and the Frutista Freeze.

We're also, with secondary media we'll be doing Fresco, which is our nine items with under nine fat grams at Taco Bell.

And what we're doing with KFC is, we're able to advertise both the high end and the low end, the chicken on the bone, and the portable-type products.

So I think we're getting the benefit of advertising these news layers that we are creating, and you'll see a lot more of that at Pizza Hut and Taco Bell in the balance of the year.

Was that fully ramped during the quarter or was that something that took place over the quarter?

I think we targeted -- our calendar is variable, okay?

In the sense that we have bigger news at different parts of the year.

So I think we're loaded up more in the second and third quarters than we would have been in the first quarter.

First quarter, you usually don't bet the ranch on all of the media because you can be affected by weather and a lot of different things.

But the second and third quarter with the bigger times of the year.

Okay.

And then quickly, could you give us a little color on the outlook for FX, at least in the second quarter or whatever you can give as an update to your '08 guidance would be great.

We didn't specifically provide -- update our full-year guidance on FX but obviously, it is looking pretty darn good.

I would use the first quarter levels for China and YRI as a good estimate for Q2.

Beyond that, we just don't like to get in to guessing what the currency impact is going to be.

But I think it's pretty safe to say that Q2 again will be pretty strong for both of our international businesses.

We do expect the year is going to be strong, particularly in China.

Obviously the Chinese currency, I think, broke to new levels against the dollar just recently.

It actually is down -- it cracked below the seven level.

So, that's on an obviously strong path, and again, we don't try to get into predicting currencies, but if you extend that out, that should be a pretty darn good benefit for our China business for the full year.

Great, thank you so much.

Thanks Rachael, next question, please?

Your next question comes from John Glass with Morgan Stanley.

Hi, thanks.

Just two quick ones.

On your U.S.

operating profit growth of 5%, how dependent is that on refranchising, or are those independent events?

Not dependent.

Got you.

And then, your tax rate has the been a benefit to you for an number of years, and you seem to be able to under promise and over deliver and this year you are talking about a 28% to 30% rate, so much higher than you have been.

Is that still your guidance, and if so, why?

Why that is that suddenly and finally changing from reductions in the last few years?

Yes, that remains our guidance John, and the reason is we got some big benefits from two items in the past.

One has been, when we became foreign tax credible, that gave us a large window to be able to take advantage of lower tax rate for an extended number of years, and then the other benefit we have gotten has been returns of our federal forms.

When those get settled, that settlement process usually yields an upside and we had a period of time where we had multi-year settlements coming through, but now the IRS is pretty much caught up and so we're going to get sort of one settlement a year.

So the foreign tax benefits that we have gotten over time, and the benefit of having multiple years of settling with the IRS will just get diminished over time.

Okay.

Well that's helpful.

Thank you.

Thanks, John.

Next question, please, Carrie.

Your next question comes from Jeff Omohundro with Wachovia.

Thanks, just wondering if I could get a little more color on the initial response to the delivery pasta at Pizza Hut.

Maybe in terms of mix relative to your target?

And what sort of product addition set line are you thinking about now?

And do you think there might be other opportunities to leverage Pizza Hut's delivery capabilities with further new products there?

Thanks.

First of all, we're very enthused by the reaction.

The mix has been strong and stronger than test market.

We have a number of pasta items, new items that are in development right now, and so we think we'll be able to develop a more complete line of Tuscany pastas as we go down the road, so you are going to continue to see us go after the pasta market, our bold goal is to try to make that as big as our pizza business.

So, we're not looking at this as a small idea.

Now obviously, we're a long ways from making that happen, but we know the consumer wants to have pasta delivered and we have a delivery system that is there for the use and we have an oven system that also allows us to really bake some really delicious pastas.

So you'll going to see a more of a full line of pastas as we go forward.

The other thing is that -- you were hitting on this, we have the opportunity to use our delivery system to deliver more items as well.

In addition to pasta, that's why we have WingStreet, and WingStreet gives us an opportunity to develop flavored wings, and we're look at other types of chicken products that could go n to that system as well.

We are -- the big news on Pizza Hut is we are transforming the brand to move from just pizza to be pizza, pasta and chicken.

So we're moving from pizza to home meal replacement.

And the great news about this is the consumer gives us tremendous credibility to do just that.

Both the chicken and pasta items that we have developed fit very well underneath the Pizza Hut umbrella, and it actually excites our current customers and is bringing in new customers, so we're happy about that.

Thanks.

Thanks, Jeff, next question, please?

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

Thank you.

Wanted to ask the question about the level of discounting and promotion in the U.S., as we prepare to launch the Why Pay More menu at Taco Bell, is that because you see the level of price competition increasing?

Well, I just think, Joe, we're in the environment where you have to do both.

You have to smartly take pricing to cover the cost issues, and you have to provide great value to the customers, and what we're trying to do is do both and segment those customers better than we have had in the past.

So if you look at Taco Bell we're doing that through the -- as David said, leveraging our strength and our value positioning, and if you look at what Pizza Hut did with Pizza Mia, they have launched that product as a value pizza, at the same time as reduced discounting on other pizzas.

So, we think that is right balance.

My suspicion is competition has to find that right balance for them as well, because they have the same cost pressures pretty much that we have got.

The worst thing you do in our industry, Joe, and you know this as well as anybody, is to discount your product and get zero credit for it.

Okay?

You are just throwing money down the drain, and your margins will go down.

What we have done is we have figured out how to give people value that are looking for value, but do it in a very targeted basis, and what we have done now, we used to be mass, mass couponing and discounting and got very little credit for it at Pizza Hut.

But with the Pizza Mia, we think we have the best tasting, best value product on the market that has been particularly designed to give customers value.

And, I think we're very pleased with where we are at with Pizza Mia and it's sustainable.

We now have the opportunity to offer, if you saw the ad, we talk about how this is every day value.

You can count on it.

The price isn't going to change, it's there.

We have got this geared for sustainable, every day value, whereas most pizza consumers are trying to figure out what the coupons mean.

We have got this things really simplified and I think we're better positioned to compete over the long term.

Taco Bell we stand -- we're number one for value.

Okay?

We can take one or two or three or even nine, 10 items, and bundle them differently, talk about them differently, and get a whole lot of credit for it, versus just taking our pricing down willy-nilly on a number of items.

So we think these things through very carefully, because we're very mindful of the unit economics that we want and our franchisees want as well.

Thank you.

Thanks, Joe.

Next question, please?

(OPERATOR INSTRUCTIONS) Your next question is a follow-up from David Palmer with UBS.

Hi, guys, two follow-up questions.

Rick and Dave, I asked you this last quarter,but are you seeing any evidence anywhere outside of the U.S.

of a lowering consumer demand?

For instance the UK might be a logical candidate for some weakness?

But, again, are you seeing a slowdown anywhere?

We have not seen sort of a global slowdown.

You always have markets that are doing better than others.

You mentioned one, probably the UK, which is probably slower than it was a year ago at this time.

But it certainly -- there's nothing prevalent that we have seen outside of the U.S.

Okay.

And Rick, thanks for your comments on the refranchising.

I was just wondering if you could clarify exactly what is it in the financing market that's causing the slower than hoped pace, in terms of what you were thinking internally would be your best case for refranchising pace, is it simply the borrowing terms, whether it be the financing rate or caps on loan to value are leading to offer prices than are lower than what you are targeting?

Is that it?

The short answer is yes on the large deals.

What I said before is on the small deals we're able to still make that work, because people have equity in their existing business, and it's enough that they are buying a small package to usually make the banks happy.

What you're seeing on the larger deals is the banks, and there aren't that many of them lending at all, but you see the banks requirements 35% equity or more on some of these deals.

It's interesting.

In the past, we have actually been having to watch the banks.

What I mean by that, is we always on our refinancing required a fair amount of equity.

We have always required 25% or so equity.

And some banks were maybe willing to be more aggressive.

We're now in a situation where it is reversed.

The bank are requiring 35% plus equity to lend, and it's hard for the buyers in some cases to make that work.

We're still pursuing buyers.

We still think we can get some large deals done, David, but it is going to be harder because there's fewer buyers who are willing to put up that kind of Equity.

Thanks, that's helpful.

Thanks, David.

Do we have any more questions, Carrie?

At this time there are no further questions.

Okay.

Well let me wrap this up just with a few summary comments.

First of all, our global portfolio this year will lead us to another year of EPS growth of at least 11%, building on our track record of consistency.

Next, you can expect global growth with 1,500 new stores opening around the world, number one global retail developer in the world is Yum!

Brands.

And third, each of our businesses will generate free cash flow giving us the global capability to return over $2 billion to our shareholders through share repurchases, and dividends this year.

So, we're off to a good start in 2008, and we're pleased that we can report to you that we are going to have another good year.

Thank you very much.

This concludes today's conference.

You may now disconnect.