百勝餐飲集團 (YUM) 2008 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the 2008 third quarter earnings conference call.

All lines have been placed on mute.

After the speakers' remarks there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS).

Thank you.

I will now turn today's conference over to Mr.

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

Thank you, Christy, and good morning.

Thanks for joining us on our call.

This call is being recorded and will be available for play back.

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

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

We would also like to advise this call includes forward-looking statements that reflect management's expectations based on currently available data, however, actual results could differ materially from these projections and are subject to future events and uncertainties described in the Safe Harbor statement included in our earnings release last night.

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

investor events.

First, Wednesday, December 10th, from approximately 9:00 a.m.

to noon eastern time, our 2008 annual conference for investors and analysts will take place at the New York Stock Exchange.

Registration is required and we will be sending you registration information very soon.

Second, we will be in Europe from October 16th through the 22nd visiting London, Milan, Zurich and even Frankfurt.

If you are in these cities and would like to meet us, please contact us.

Finally, Monday, February 2nd, fourth quarter earnings will be released.

Today on our call 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'd like to turn the call over to David Novak.

Thank you, Tim, and good morning, everyone.

I'm pleased to report 10% worldwide system sales growth and 16% EPS growth for the third quarter in spite of all the bad news surrounding the financial markets and the economy.

Even though our system sales growth was solid for the third quarter, earnings benefited from a favorable tax rate and substantial share buybacks, which more than offset our weak profit performance in the United States.

We are confidently reaffirming our full-year forecast for 12% EPS growth based on our year to date 17% EPS growth and our fourth quarter outlook for both strong global system sales growth and double-digit operating profit growth.

Importantly, the global strength of our business in 2008 is widespread and best demonstrated by the sales growth performance for each of our divisions, with the notable exception of the KFC US business.

This year's international expansion continues to be robust as we drive record new unit openings and profits in both China and Yum!

Restaurants International.

In the US, Taco Bell and Pizza Hut are both delivering solid same-store sales and profit growth performance for the full year.

Our KFC US business continues to lag the rest of our global portfolio, and is the driver of our underperforming profit performance in the United States business, along with unprecedented commodity inflation.

We expect a turnaround KFC performance in 2009 with the introduction of our successfully tested Kentucky grilled chicken.

Nevertheless, with all the turmoil in the markets, some challenging questions are being asked about our business that deserve to be answered, so let me address each one directly.

Number one, is the China economy slowing and if so, will this affect the Yum!

China business?

We don't have a crystal ball and we'll leave the macro economic forecast to you.

We agree that China's short-term GDP growth rate could slow to about 8% for 2009 from its historical double-digit rate.

However, this means China will still be the fastest growing major economy in the world.

Frankly, we think our business can thrive in any economy growing at 8%, and especially with an economy that's growing consumer spending like China.

For those of you that have been following us closely, our story has been consistent.

Our growth model for China has always been development driven and less dependent on same-store sales growth.

Now let's look at the facts.

You will see record new unit development this year.

Development that is consistently provided strong cash on cash returns and a two-year payback.

Next year's development pipeline looks equally as good, and is driven by the strength of both the KFC brand, now in nearly 500 cities, and Pizza Hut casual dining in nearly 100 cities, leveraging our nationwide distribution system and 600 person development team.

Looking ahead to 2009, we continue to believe we will achieve our 20% profit growth target.

While our same store sales in mainland China have slowed to 5%, it is important to remember two things in this case.

We're overlapping 11% growth, and we have added 493 new units in the past year, for 21% unit growth.

When you think about it, who wouldn't want to have our leading position in a country with over 1 billion people, a middle class already reaching 250 million, and consumer incomes growing 8 to 9% per year.

I think it's safe to say we're glad to be in China.

Question number two.

Will Yum!

ever grow US profits, especially in the midst of such economic turmoil?

First, Taco Bell and Pizza Hut are already both delivering solid same-store sales and profit growth performance for the full year.

This performance is particularly impressive when you consider the record commodity inflation everyone is experiencing in our industry.

KFC is the sole problem in the US and we are working to turn this brand around.

We expect to deliver US profit growth in 2009 because, number one, we expect to turn around KFC performance in 2009 with the introduction of our successfully tested Kentucky grilled chicken.

Number two, Pizza Hut and Taco Bell will continue to innovate around developing permanent incremental sales layers.

Number three, we expect commodity inflation to slow and finally, we are taking aggressive steps to lower our cost structure and Rick will provide more of the details on that later.

Believe me, while US blended sales rose 3% systemwide and 4% in the company, we know we had a bad profit quarter.

But we also know the glass is more than half full.

The fact is, we are much better positioned today at Taco Bell and Pizza Hut since what we believe will be permanent sales layers have been very successfully launched this year.

Help is also on the way for KFC with grilled chicken.

Stepping back, our brands in the quick service category have demonstrated staying power over time, and given their affordability and convenience, are better suited than most to perform even in times of economic turmoil.

Next question we've heard.

Will the credit crunch stop your refranchising program in the United States?

First, we expect to meet or even exceed the current target of 500 stores this year, with well over 400 done year to date.

The credit crunch has slowed down the timing to close these transactions, but it has not halted them.

So we're currently meeting our refranchising targets for this year.

I also want to emphasize that our business growth and success are not dependent on this timing.

We've always said that this is a long-term opportunity for us, not a problem.

One final question we've heard -- we haven't heard, actually, we haven't heard this one, but I want to address it.

Will the credit crunch stop or substantially slow your new unit development engine?

First, remember China is mostly company-owned, and totally self-funds all of its new unit development.

Second, in YRI, Yum!

Restaurants International, franchisees drive 90% of our new unit growth.

To date, we have not seen a slowdown in the development pace.

Importantly, our international franchise development is driven primarily by large well capitalized franchisees who often self-fund growth or are better positioned to raise capital.

Next year's development pipeline looks equally as good as 2008's pipeline did this time last year with broad-based growth coming from across the globe.

In summary, China is still a rapid growth, high-return business to go along with the steady growth of Yum Restaurants International.

In the United States, Taco Bell and Pizza Hut are having good years, and tested plans are in place to turn KFC around.

This makes us confident about 5% US profit growth in 2009.

Next, the credit crisis here in the US has slowed down the time line for refranchising transactions, but has not halted them.

In fact, we will meet this year's refranchising plan.

Finally, the credit crisis has not slowed our international development machine as we self-fund China growth and leverage our well capitalized franchisees.

That's my best shot at answering the questions I know that are out there, and I welcome any additional questions you have during the Q and A.

Now I would like to turn it over to Rick Carucci, CFO, for more on our financial performance, and I'll come back and give you more color on our 2009 growth prospect.

Rick?

Thank you, David, and good morning everyone.

Before I get into the detail, let me give you the headlines.

We are on track to deliver 12% earnings per share growth in 2008 based on 17% unit A EPS growth on our expectation for double-digit operating profit in the fourth quarter.

By Yum!'s typical standards, despite solid sales, third quarter operating performance was weak.

We drove 16% EPS growth in the third quarter from solid international profit growth, a lower tax rate, and substantial share buybacks.

Led by record international unit development and aggressive cost actions in the US, we are well positioned in 2009 for another year of achieving at least 10% EPS growth.

And last but perhaps most importantly, we will have banked well over half of our 2009 EPS growth before even entering the new year.

Now let's get into the details.

I am going to comment on Yum!

s third quarter results, our current full-year 2008 outlook, and perspective on 2009.

In the third quarter, mainland China system sales growth was 19% excluding ForEx.

This was driven largely by net unit growth of 21%.

We developed a record 123 units in mainland China alone, which was 48 more than last year in quarter three.

Same-store sales growth was a solid 5%, lapping a strong plus 11% year ago.

This sales result was negatively affected by the devastating earthquake in May and the Olympics in August.

Third quarter margins were 2.3 percentage points below last year primarily due to continued high chicken costs.

Chicken costs have taken much longer than expected to come down, and we no longer had double-digit same-store sales increases to offset them.

Nevertheless, we are confident that the margin decline is temporary.

We will benefit from a 3% price increase already taken at the end of the third quarter.

and reduce chicken costs by the end of the fourth quarter.

We believe that margins will begin to improve during the fourth quarter.

and that we will achieve typical China levels by quarter one of 2009.

Importantly, we remain confident of our China business model.

Please remember that our competitive position continues to improve.

We expect to end 2008 with more than a 1500-unit advantage versus the competition.

That lead was only about 325 units in 2002.

Our new stores continue to perform well with cash margins exceeding 25%.

We are particularly pleased with our new store performance in tier 3 and tier 4 cities, which are generating solid margins in the first year and paying back our investment in two years.

With this competitive position and great returns, we continue to build units faster than ever.

Yum!

Restaurants International completed the third quarter slightly above our previous projections.

In July, we told to you expect YRI's third quarter performance to come in below our first year profit growth rate, as they lapped stronger year ago results in two equity markets, Pizza Hut UK and Pizza Hut Korea.

In the third quarter, YRI generated strong top line performance with 4% same-store sales growth and 4% net unit growth.

Profits were up 4% on a constant currency basis, lapping impressive 14% growth in 2007.

YRI's third quarter results are more impressive when you consider the loss of a VAT tax exemption in our Mexico business.

Excluding the impact of the VAT, YRI profits were up 11% on a constant currency apples to apples basis.

We also realized a profit upside of $6 million in the quarter due to a favorable impact of foreign currency conversion.

Please note that we expect this trend to reverse to an unfavorable ForEx impact in the fourth quarter.

Ultimately, it is our established presence in a multitude of growing markets, coupled with our franchise business model that make YRI a crucial part of Yum!

s overall growth story.

US profit results declined 60% in the third quarter driven by continued commodity inflation and weak sales and profits at KFC.

System same-store sales growth of 3% was in line with our full year target.

Company same-store sales growth of 4% was led by strong performance of plus 8% at Taco Bell and plus 6% for Pizza Hut, partially offset by a 4% decline at KFC.

However, this level of sales could not offset the impact of record level commodity inflation.

Third quarter commodity inflation of $32 million was slightly higher than the second quarter, and was at a level that we normally see in an entire year.

Looking ahead, we expect the year-over-year impact of inflation to moderate in the fourth quarter.

As a result, US profit performance is expected to dramatically improve in the fourth quarter as our pricing actions finally begin to catch up with commodity inflation and we expect same-store sales growth to continue at the levels we have seen all year.

Importantly, our overall US same-store sales results thus far in Q4 are at similar levels seen in Q3.

On the financial side, Yum!

's third quarter results benefited from a lower effective tax rate and substantially reduced average diluted shares outstanding.

As expected, higher interest expense partially offset these significant benefits.

As we have said before, bad stuff happens every year in a global business as diverse as Yum!

's.

Good things also happen every year.

And in that light, I would like to give credit to our tax team for the great work they do to optimize our global tax structure.

This quarter, these efforts resulted in a lower year-over-year tax rate.

Now for a brief update on US refranchising.

In December, we announced the expansion of our refranchising program, targeting US ownership potentially below 10% by year end 2010.

After refranchising 242 units in the third quarter, our year to date total now stands at 421 units.

We fully expect to meet our target of refranchising at least 500 stores for the full year given this year-to-date performance and the solid deal pipeline for the balance of the year.

Credit market conditions have affected our refranchising efforts, as lenders have increased their equity requirements for our franchisees.

Additionally, lenders have intensified their review process, which has added time to complete certain transactions.

Our strategy continues to focus on first, finding the best franchise partners that will drive the business for the long term, and second, realizing fair value for our assets.

We will not compromise either one of these objectives.

Our goal remains to potentially reach below 10% company ownership by year end 2010.

This refranchising initiative will result in positive benefit to US restaurant margin, operating margin, and Yum!'s overall ROIC as well as less demand for capital spending from our US business.

However, as David said earlier, our business growth and success do not hinge on hitting the time line.

Now that we have discussed the third quarter, let's quickly touch on 2008 full year outlook.

As mentioned earlier, we have reaffirmed our full year EPS growth forecast of 12% or $1.89 per share when we exclude special items.

We expect that special items will be in the range of a net $0.03 per share gain for the year.

This is a reduction of $0.03 from our previous estimates as we have revised our refranchising gains and losses and our restructuring costs.

This will result in an estimated EPS of $1.92 on a reported basis.

Versus the guidance for the year we provided last quarter, we are updating the following material changes.

Both our China and YRI businesses are on pace to exceed last year's record development.

Based on this performance, we are increasing our 2008 total international development guidance from 1300 to 1400 new units.

Our 2008 forecast also assumes underperformance of our US business when compared to its long-term operating profit target of 5%.

We now expect an 8% decline in full year US profit based on weak year to date results.

As mentioned in my headlines up front, we expect double-digit operating profit growth in the fourth quarter.

We expect each of our businesses to post better constant currency operating profit than they did in the third quarter.

It is very early in the fourth quarter, but so far we have seen no changes from our third quarter global sales strength.

Now I would like to talk about our perspective on 2009.

As a global restaurant company, we are obviously concerned about commodity inflation and the strength of the U.S.

dollar.

Before I get into how our overall business will perform in 2009 let me provide our current thoughts on these two items.

First regarding commodities.

We are hopeful that the recent dramatic declines in some commodities will materialize into benefits for our cost structure in 2009.

While this scenario looks promising, we will not count on it for now because it is too early.

Regarding the strengthening US dollar, it is hard to predict where trends may go in 2009.

However, based on recent activity, we would expect some negative impact due to currency translation on a 2009 YRI business.

On the other hand for our China business, based on where we are today, we would expect some positive currency translation impact.

Obviously we will have to see how this unfolds, and we will update you as we get closer to 2009.

There is obvious concern today about the global economic environment.

However, it is important to step back and review the Yum!

growth model and put economic concerns into context.

I believe our shareholders should remain confident in our ability to continue our track record of growth in 2009.

Here is why.

I believe there are two key reasons.

First, remember that in our growth model, over half of YRI system sales growth is driven by new unit development, while for China over three-quarters of system sales growth is driven by new unit development.

It is extremely comforting to know that a large portion of our international growth and development is extremely likely to be delivered.

Given our record 2008 performance, over 1400 new stores will be in the ground and operating as of day one 2009.

These stores will provide a full-year of sales and profit results in 2009 versus the less than one-half year impact they had in 2008.

In addition, our new unit pipeline continues to look strong for 2009.

Second, in our US business, we remain confident that we are taking the right approach to improve our performance.

We are preparing to succeed even in a tough environment.

One way we plan to grow our profits is through aggressive cost management.

We expect that aggressive management of our costs, net of the operating profit for gone through refranchising, will yield an upside to US profits in 2009 of about $30 million, excluding special items.

By itself, that amount is equivalent to a 4% increase in US year-over-year profit.

When you add this up, we have effectively already banked well over half of our 2009 EPS growth before even entering the new year.

In addition to these benefits, we believe our brands globally are well positioned in all of our businesses.

Shortly, David will take you through some of our major sales initiatives.

Finally, we are a well capitalized company with a strong balance sheet combined with substantial cash flow.

As David mentioned earlier, each of our businesses provide more than enough cash for their investment needs.

This provides for tremendous flexibility and staying power.

We believe we have the right business model to succeed, and we are well positioned to deliver growth going forward.

To wrap up, we expect to deliver a successful year in 2008.

We will build upon our track record as the largest international developer while developing 12% EPS growth, our 7th consecutive year of at least 10% EPS growth.

Our international development, stronger competitive positions, and aggressive cost management place us in a very strong position to extend our EPS growth track record into 2009.

We again expect to generate consistent financial performance, impressive global growth, strong free cash flow, and substantial returns to shareholders.

Back to you, David.

Thanks, Rick.

Now let me give you a little more color on our 2009 growth prospect for each of our businesses in terms of our four key strategies.

Which is, number one, to build leading brands in China in every significant category.

Two, drive aggressive international expansion and build strong brands everywhere with Yum Restaurants International.

Three, dramatically improve US brand positions, consistency and returns.

Four, drive industry leading long-term shareholder and franchisee value.

First I'd like to tell what you we are bullish about in our China business.

We are on track at 3,000 units in nearly 500 cities in this megamarket, about 50 more than the end of last year.

Our KFC business continues to grow unabated in China.

We are developing new units in more and more cities.

KFC is moving into new proteins like fish and beef and as we speak, we are launching Szechuan beef wrap, a sliced beef take on Taco Bell's crunch wrap.

KFC is also just beginning to launch into home delivery, giving consumers more ways to access the great taste of KFC while driving our dinner business.

This is based on successful taste testing.

Pizza Hut casual dining hit its 400th unit this quarter, and is well on its way to building at least 2,000 units.

Tea time is a big win with a great selection of beverages and desserts, and is driving incremental sales in the afternoon as we leverage our asset.

Pizza Hut home service, our new delivery business, continues to expand, ending the quarter with 70 units.

We're proving out the business model and increasing our operating capability as we move towards the national rollout of this brand.

East Donning, our home grown Chinese quick service restaurant concept, continues to make major progress on its menu and business model.

We now have units in three cities.

Shanghai, Beijing, and most recently Guangzhou, This is a huge growth opportunity and we believe could be as large as KFC given the obvious popularity of Chinese food.

All this, when you look at it stepping back, it allows us to conclude that China has great momentum in each of its brands as we move into 2009 and continue our march to at least 20,000 units over the long term.

Now let me tell what you we are bullish about in our YRI business.

International new unit development is full speed ahead.

2008 will be another record year with over 800 units.

Our development is broad-based and not dependent on any one region or economy.

YRI alone continues to be the largest retail developer in the world.

This does not include China.

YRI is gaining speed on its sales growth initiatives as well in beverages, breakfast, multiple proteins, pasta, tea time, delivery, and balanced menu offerings.

For example, crushers, our frozen beverage initiative, began with a one unit test in KFC Australia earlier this year.

Now we are stretching to get this initiative into nearly 200 units in 10 countries by the end of the year.

Customers love the crusher line of products, our mango, toffee, and cookies and cream line extensions.

We can see this becoming a sustainable layer that we can build on and roll out to even more countries in 2009.

So as you can see, the momentum of YRI is solid, and we are confident we will be able to deliver our target growth of at least 10% profit growth in 2009.

Turning to the US business, we are more convinced than ever that Taco Bell is a Mexican inspired powerhouse brand that owns value.

This is a vibrant brand that has a loyal following.

Taco Bell has done a great job of delivering sales growth initiatives and a steady stream of new product innovation.

Frutista Freeze and Why Pay More value menu have been unqualified success.

We have only just begun with Frutista beverage innovation with several line extensions in the queue.

What's more, the $0.89 cheesy double beef burrito is the best value in the industry.

No one gives you more for less.

Another new product, the volcano taco, has opened a major area of innovation around our core product, tacos.

Taco Bell is now aggressively going after the dinner day part with unique packaging and bundled meals and its fresco line of great tasting no sacrifice, low-fat, low-calorie products which is being tested for national advertising in 2009.

The pipeline is full at Taco Bell and getting fuller.

Pizza Hut is doing a remarkable job shifting from defense to offense with value, pasta, and chicken.

Pizza Mia, our value pizza product, has overtaken pan pizza in pizzas sold and is perfectly timed.

Consumers love both the product and the value at pizza mia.

We are creating entire new delivery category with Tuscani Pasta.

It has already become a $500 million brand, and is on its way to $1 billion.

Customers love the restaurant quality product and our new breakthrough reality advertising campaign.

WingStreet, our brand of flavored wings is now growing at 100 units per month pace and national scale and national advertising is in our sights with our franchisees' support.

No question, we are outperforming our competitors and demonstrating our success in transforming the brand from pizza to pizza, pasta, and chicken.

The fact is, KFC is our sole problem in the United States and we are going to fix it.

Roger Eaton, KFC's new president, who joins the US team from our Australia business, where he led the team to seven straight years of quarterly same-store sales growth, is off to a running start in reshaping the business with new products.

I'm also pleased the franchisees are enthusiastically endorsing the new direction.

We are working at what Roger calls warp speed to build the product pipeline.

For example, Original Recipe Strips, a contemporary boneless original recipe product, was launched beginning the fourth quarter and we are doubling our new product test market.

On the value front, the $10 grocery store challenge, the seven-piece family meal you can't buy for $9.99 at a grocery store, is providing dinner value to customers in today's environment.

Initial test results for a low priced individual eater value menu is also promising.

However, Kentucky grilled chicken is our big news for 2009, and will be launched nationally in the second quarter.

Our franchisee board voted unanimously for this product based on both sales and profit test results.

Consumer reaction to this product is great.

They love the taste and the fact we are addressing the pent up desire for a non fried product from KFC.

So we clearly have exciting initiatives at each of our US brands for 2009.

Let me wrap up by saying our global portfolio continues to deliver solid top line sales results.

We have good momentum as we move into 2009.

I'm confident the strength of our business will allow us to deliver at least 10% EPS growth for the 8th straight year in 2009.

Now I would like to open the discussions for questions.

Let's take your questions and move on from there.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Joe Buckley of Banc of America.

Thank you.

Rick, I'd like to explore your comments about the commodities a little bit further.

I think on the last call, you talked about having very limited visibility into 2009, maybe through the first quarter, if I recall correctly.

Wondering if that's been extended some, and with the corrections in grains what are you seeing in the marketplace?

Are you seeing some of the protein costs come down, or is the rate of increase just moderating?

We still don't have a lot more visibility, Joe.

What we have looked at, if you just sort of extended the commodity prices now into 2009, we'd expect to see a flat to slightly decline in year-over-year costs, but a lot could happen between now and then.

Clearly we're in the sure how suppliers are going to deal with the current environment that they are in right now.

So obviously lower commodity costs will help.

How quickly that gets passed on still remains to be seen.

Where are you in terms of locking in for '09 versus where you might have been at this point in 2008?

We're still going through that process now, so probably not that different.

Still early.

Usually we start locking in around now, and we're hoping we could do that to the same pace, suppliers may be a little less reluctant to sign longer term contracts but obviously we saw the ability to go to the open market and lock in certain things.

Thank you.

Thanks, Joe.

Next question, please, Christy.

Your next question comes from the line of Mitch Kaiser with Buckingham.

Thanks very much.

First, on China, looks like you are going to end up with 500 cities at the end of '08.

Are you thinking about '09, are there additional cities to go into, or can you give us a sense of where you might end up in terms of the number of cities at the end of '09?

We generally have been adding around 60 cities a year, and that's probably not a bad benchmark for 2009.

I haven't seen the detailed rollout, but it usually comes in around that level.

I see no reason why that would change.

Secondly, on I believe the 2010 target for refranchising, did you indicate a couple quarters ago, $1.1 billion in proceeds.

Just like to know if you are adjusting that number at this point.

No, at this point we are going to keep that number.

Okay.

One last question.

I saw your interest expense was actually lower third quarter versus second quarter.

Could you comment on that and the outlook going forward?

Yeah, Mitch this is Tim.

It would have been lower revolver balances.

Probably be a little bit favorable for the year versus what we had thought last time, but it's basically because we were getting some very good rates and -- between the -- we have a very good revolver facility and also the term loan that we took out in June has some very good rates.

But it was basically just cash movement between quarters when you are looking at Q2.

If I could follow up on that, you get about a $1.2 billion financing in December last year, at about a 6.5% rate.

If you were to go to market today, can you give us a sense of what type of rate you can get?

Well, first of all, the bond market is, from what I have seen day to day, almost no issuances.

So it's very, very hard to predict what that would be, Mitch.

But rough guesses, based on where the volatility is today, 8 to 9 range.

Okay.

Thanks very much.

Thanks, Mitch.

Next question, please, Christy.

Your next question comes from the line of John Ivankoe of JPMorgan.

Thanks.

Two questions, if I may.

Over time, it seems that the international businesses for quick service broadly have proven to be more discretionary or more cyclical than the U.S.

businesses.

Could you comment on that, and whether you think your brands are positioned for a downturn with value, or what you have been doing with pricing, or how we should think about the performance of your brands as this news continues to pile on?

Well, so far, we really haven't seen a global economic slowdown.

As you look from the earning release, our franchise-only business units have continued to perform very well.

South Africa was up 25%, Middle East 23%, Caribbean, Latin America 13%, Europe 12, Asia 7.

So this is broad scale.

A few -- we've had a few difficult markets, which have been challenging to us for some time, like in the UK, Japan, Canada, and South Korea, but having said that, Australia, which is one of our more highly penetrated markets, is having another banner year.

So we expect to meet our full-year targets for this year, and we're excited about 2009 and we're again going to have another record year of openings.

The US is apparently benefiting from some trade down, certainly the performance of your brands was great in the quarter, all things considered.

Do you think that's happening internationally, or is it just you are so underpenetrated relative to what your potential is?

We try to make sure that two things always happen.

We're always affordable, and we're always convenient.

With the great tasting food that we have.

And I think we're forever mindful of that affordability equation.

One of the things that we really see is that the developing countries are doing extremely well, and obviously these are countries where the discretionary income is lower, but one of the things we're doing is making our product very affordable to them, and that's been one of the keys to our success.

When you look at the overall category, and you are a better student of it than we are, or just as good, anyway, is that we have staying power in terms of what we basically offer, okay.

People always have to eat, people are always looking for affordability, and people in more and more countries are looking for convenience.

That's always helped us in the United States.

And this world is more alike than unalike, and it's helped us around the world as well.

We feel we're very well positioned with very powerful brands, and we have great staying power, and we'd obviously rather operate in better economies, but we can survive in most any economy.

Just to build on that, John, obviously as David mentioned in his speech, we continue to do a lot of sales initiatives at YRI.

I think those sales initiatives include value initiatives, they include new product initiatives and new sales layers.

So I think that keeps us in pretty good position.

But the last point you made I think is an important one, we are underpen trade.

We have two things going for us outside the US.

One is we're very underpenetrated.

Less than three restaurants per million people versus the 60 per million people in the US, as well as we have even if there is a slight economic slow down globally, which we have not seen yet, the middle class is still growing internationally at a large rate, and that is very good fours.

So if you look at the combination of underpenetration and growing middle class, it's still a very powerful combination for us outside the US.

And the developing countries, and especially Asia, China, you are looking at high growth.

So that's where we have our competitive strength.

Okay, great, thanks.

Thanks, John.

Next question, please, Christy.

Your next question comes from the line of Jeffrey Bernstein of Barclays capital.

great, thank you.

Couple questions.

First, Rick, you mentioned, I think you said $30 million cost cutting in the US to help profits in '09.

Wonder if you could go into more detail about what areas, restaurant level versus G&A, and perhaps if you can address if there are similar opportunities in YRI and China to do some cost cutting, then I had a follow-up.

Regarding China and YRI, everywhere we look at costs, and I think you are not going to see a huge change there.

I think we will see a bit more G&A leverage in China than what we've had historically.

Historically our G&A has pretty much grown with revenues.

Going forward we'll get a little bit of benefit on G&A leverage in China.

Regarding the US piece of it, really the main thing we did -- first of all, let me remind people what the $30 million.

The $30 million was the net between the cost reductions and the refranchising operating profit, the loss that we get when we refranchise go, from an operating profit margins to royalty rates.

We lose some money in that translation.

So the number we gave you was a net number of the cost savings less than downside.

And really what we did is we just looked at a zero base approach.

So we're still in the process of following those -- finalizing those plans, and we'll give you more information later in the year on that.

Okay.

Then just a follow-up question.

I know KFC seems like the big story for '09 in the US.

If you could talk about the test results that you are seeing with the grilled product, perhaps feedback from franchisees, and customers in general, whether you have any kind of metrics to support what kind of lift you are seeing, or mix shift, anything to give comfort with the '09 growth.

Thanks.

Probably the biggest thing on the test market is just the staying power of the product.

That's something that the franchisees wanted to see and we wanted to see as well.

So this has been test market for an extended period of time.

We don't really have any numbers to give you on what we expect it to do, because obviously it's evolved over time, and how we are going to market it is going to be a little different but we're optimistic it will be a significant sales layer for us.

Just lastly, you mentioned last quarter 26% tax rate give or take.

I know it was obviously extremely volatile, and you've been able to come in below that.

Should we assume that's still a reasonable rate for '08, or based on the third quarter, should we assume similar trends for the fourth quarter and coming in well below that?

We probably expect to still come in towards the low end of our range on full year tax for 2008 and on a go forward basis, we still think about a 30% rate is about the right long-term rate.

One thing we do want to remind people, though, is last year in 2007, we had an abnormally low tax rate in the fourth quarter with a 16% tax rate, so clearly we believe there's going to be a quarter on quarter downside on the tax as we go into the fourth quarter of '08.

We expect to slightly beat by the full year.

I think the last full year number we gave was about 26%.

We should be slightly favorable to that on the full year bays.

Hey, Jeff, one other point just on the KFC growth product, I think the big thing does it for us is it really attacks the number one issue we have at KFC, and that is people love our fried chicken but they also would like to have a non fried option, and they love the choice of being able to mix and match their buckets, and so it really opens up a whole new layer for us and allows us to get more light and medium users to participate more frequently with the brand.

So I think that's the thing that we're most excited about.

The other thing is, is that we work very hard to get the cooking platform right.

We have an oven that works very well.

Our franchisees are happy about it.

And I think Rick brought this point up, but it's very key.

What's really great about this product, we've been testing it over the last couple years, and it's sustainable.

It's not a product that comes and goes away.

The fact that we can sustain it in the context of our fried offerings is really significant news something, that we're very excited about.

So we're really working on ways to even more dramatically introduce the product, build awareness of the product in the national launch, franchisees voted for it unanimously in terms of their national advertising committee.

So we've got support and enthusiasm behind this, and thou we're just into how do we make it as big as we can possibly make it.

Thank you.

Thanks, Jeff.

Great to hear from you.

Next question, Christy.

your next question comes from line of John Glass of Morgan Stanley.

Thanks.

First, if we could go back to the China comps for a minute, how much do you think the Olympics impact this quarter?

I guess more importantly, have you seen a traffic in particular revive since the Olympics have ended?

Well, our best estimate of the impact of the Olympics was about a point for the quarter.

So it wasn't a huge impact.

But we originally thought it was going to have no impact.

It was harder to get around the country and people wanted to stay home and watch the Chinese athletes perform.

We haven't -- it's still early days in the fourth quarter but we haven't seen a huge difference versus our Q3 trend at this point so I think it the's pretty consistent.

Again, just as a reminder, our business model doesn't require double-digit same-store sales growth, which is what we saw in the first part of the year.

We always try to target and look at what system sales is in China, and we're still relatively pleased with the system sales that we're getting in China because of the record new unit development.

So I think you always have to look at those two numbers in conjunction in China.

And on that point, if you look at new store productivity in China, one very simple way to look at it would be to add the comps, 5% this quarter, and new unit growth, 19% to get like a 26% growth rate, and yet system sales came in at 19%.

So it's a 7% gap.

Though there's always been a gap, that's a larger gap than it's been historically.

Is there anything to read into that?

Cannibalization?

Productivity?

It's a good catch, John.

It is higher than normal.

And the reason for that is some of those units in the third quarter came late in the third quarter so we added a lot of units over -- well over 100 units in the third quarter, and a fair amount of those were late.

But to your point, we always have a gap, and that gap is driven by a couple things.

One is the units that we're adding in smaller cities open at lower average unit volumes than the general population.

The good news over time, we get very good same store sales in the smaller cities.

The second thing is Pizza Hut home delivery starts to take off that doesn't have as high an average unit volume as well.

Normally if you do that math there's about a four-point difference, and this time it's more than that, we will see how that settles out in Q4.

Last question, following up on a question about financing.

You talked about the franchise financing.

The bond markets themselves are sort of frozen up.

How do you think about the $2 billion in repurchase and dividends for next year?

Where do you come out if you can't borrow money next year?

Yeah, we -- quite frankly, let me come back to that in a second.

Just on 2008, we still expect no changes.

So for 2008 we said we were going to return a total of $2 billion to shareholders, roughly $300 million in dividends, $1.7 billion in share repurchases.

Year to date you may have noticed we're at $1.5 billion.

So we're well on our way there.

So we're very confident in at least meeting our commitment in 2008 on the return to shareholders.

Quite frankly, for 2009 we have to reassess as we go.

The credit market are, you know, in unusual situation right now so we don't know what we could borrow at.

The flip side of that is obviously I loved the opportunity to buy our stock at the current price right now.

So we do expect to do significant share repurchases, because as you know, even before last year we always did about $1 billion generating from our internal cash.

So we'll -- I think we expect that we'd at least buy that amount.

In terms of the extra $1 billion or so, we'll just have to reassess that as we go.

Thank you.

Thanks, John.

Next question, please, Christy.

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

good morning, guys.

I want to talk about the U.S.

I have a few questions on that.

It seems as though for 2009 some of the drivers that you saw in earnings growth for 2008 might abate and the US is going to be really in a position where it has to carry its weight much more than hat in the prior couple years.

You just had a profit quarter that was down 16%.

You are talking about an acceleration in the fourth quarter to more flattish, and then 5% growth into 2009.

I realize same-store sales are tracking pretty well and you have some cost management programs in there.

Rick, if we look at those cost management programs, my understanding is that a lot of that is G&A related and largely contingent on the ability to refranchise, so I guess the question becomes, if refranchising does start to slow, I guess how many units are you planning on those cost cutting initiatives as it relates to G&A, and what's the sensitivity there?

How should we be thinking the about that?

First of all, regarding the improvement in US profitability in the fourth quarter, and then beyond, part of that, a big part of that, is really catching up finally on the commodity side.

The year-over-year commodity increases in the fourth quarter are less than what they were year to date, because the price has started to spike up in the fourth quarter last year, and also the cumulative price increases will finally catch up and surpass, so we actually think we'll get a net benefit of pricing less commodities in the fourth quarter this year as we've taken some pricing late in the third quarter, and early in the fourth quarter.

As we go into 2009, what we've typically said in the past is that it takes awhile to go from refranchising restaurants to reductions in G&A.

And I mentioned on the last call we were going to challenge ourselves to push the edge of the envelope on that a little bit, and that's when we attached this zero-based approach.

So we are actually confident for 2009 that we are going to get that net difference regardless of our refranchising timing.

So that net $30 million we are quite confident we'll realize regardless of the pace of refranchising.

That's helpful.

If we look at the gross margins in the US, down 180 basis points in the period, clearly big commodity hit, as you have indicated, can you talk about how much the gross margin saw pressure from Taco Bell's Why Pay More menu?

Yeah, we -- again, the Why Pay More menu we don't think is a factor.

Just as a reminder, for those of you less familiar with it, the Why Pay More menu is similar to the results we had seen in the Big Bell Value Menu.

Very few customers just buy off of the Big Bell Value Menu.

So most of the people buying off of the Why Pay More Menu, similar to the old menu, are buying other product as well.

So the average ticket of people buying on the Why Pay More Menu is actually slightly higher than our overall ticket.

So we don't think it has an impact.

And also, as a reminder, at the same time we introduced the Why Pay More, we also introduced Frutista, which is a higher margin product.

So the menu mix piece at Taco Bell is not causing an issue.

We did have an issue with beef prices went up higher than expectations.

That drove a decent share of the overall commodity increase that we had when we went from 110 to 120 million for total commodity inflation.

A lot of that was driven by beef.

The other thing as you look at 2009, Taco Bell and Pizza Hut, both brands are on target from sales and profit standpoint for the full year.

So we are going into next year with two brands that are much better positioned.

I have already talked about what we're doing in KFC to reinvigorate that brand.

So I think we, overall, we have a lot of optimism and momentum as we move into the next year.

I guess to that point, David, is there a way that you guys can give us a little bit more color on the drag that KFC had on either the margins or the profit growth in the quarter, or year to date or something so we can kind of walk away and lack at Taco Bell and Pizza Hut and feel good about that trajectory?

We pretty much have told you that Pizza Hut and Taco Bell are going to be able to grow profits for the year.

So I think you can do the math and figure out what the KFC impact roughly is.

Big.

Okay, thank you.

Thanks, Steven.

Next question, please, Christy.

Your next question comes from the line of Jeff Omohundro of Wachovia.

Thanks.

Just one question.

Wondering if you could elaborate on the decision to take more pricing in China despite the sequential comp slow down, and what are your thoughts about providing incremental value perhaps in upcoming promotions given the changing macro environment?

Thanks.

Well, just to be clear, pricing is not related to the sales piece.

As I look at those -- let's separate the two.

Regarding the pricing, what happened again is we had that huge chicken spike in the third quarter last year.

We expected that price to come down more quickly than it has.

We do expect to see some benefit of that reduction by the end of the fourth quarter this year.

So we were hesitant towards taking pricing because we thought the prices would come down, our costs would come down more quickly than they did, and we happened to be growing double-digit same-store sales growth so we were making pretty good profits without the pricing.

So as it remains stickier coming down, we believe it was appropriate to take pricing at that point in time.

I don't think the two are related.

So far when we've taken the pricing, as a reminder, when we took pricing in the third quarter last year, it was the largest price increase by far we had ever taken in China because of the spike, and our transactions did fine.

So I don't really think the two are related.

I think the other thing, when you look at China, we have two things going for us.

I think anybody would want to have in any category.

Number one, we have market leadership.

We have powerful leading brands with pricing power.

Number two, we have affordable value on an everyday basis.

And I think you combine those two things, we're constantly driving value impression, and we have the opportunity to take price to protect our margins.

So I think that's what you want in any consumer goods category, and we have it.

I think when you look at the future and where we're going with value, what we're trying to do is drive home permanent everyday value impressions.

That's why we're very happy with the success of the Pizza Mia product that I talked about and also our P'Zone, which gives you an individual eater price for well under $10.

So we've got good value at Pizza Hut.

At Taco Bell, we have reinvigorated the Why Pay More menu as you know, and I think the big thing that we love there is our $0.89 double cheesy burrito, where literally you get more food for the money than anybody else in the category.

It's had a minor effect on our margin structure, but more importantly, it's really helped us drive sales, so we feel net positive about the Why Pay More menu.

In fact, we're very pleased that we were very proactive in launching that early in the year.

It's been a very good success for us.

I think our big challenge on the value front is at KFC our franchisees have actually pioneered a value menu on the low end of our menu for the individual eater out on the West Coast that we are seeing both good sales and profit numbers on at this stage.

And so we're continuing to test that.

We're also trying to make our high end more affordable and do a better job of dramatizing the real true value that you can get from a meal at KFC, which we are doing with the $9.99 seven-piece meal, where we basically take on grocery stores, which is the big competitor we have on the dinner day part right now, because more people are cooking at home but if you actually go out and bay all those ingredients you can't do it for $9.99.

So we did a very nice job there of breaking through the clutter with our value message.

So we're being very innovative from a marketing standpoint and also from a substantive standpoint in terms of trying to provide permanent everyday value that customers can count on.

I think going into 2009 that's more important than ever.

Thank you.

In fact, if you look at who is doing well in the category it's pretty easy to see who is doing a good job.

Take my hat off to Subway, take my hat off to McDonald's, particularly I take my hat off to Taco Bell, who has done an excellent job, and Pizza Hut who is clearly doing the best job in the pizza category.

Thanks.

Thanks, Jeff.

Next question, please, Christy.

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

Actually Mike sitting in for Rachel.

On the US refranchising, where I guess you're a little ahead on units but behind on proceeds, could you comment on what you are seeing in terms of multiples of refranchising and the brands where you are seeing the most push-back?

Regarding, again, as a reminder to folks, one of the adjustments we made to our refranchising process in 2008 was we sort of shifted towards some of the lower priced deals where funding was more accessible.

Based on that we've done more refranchising on Long John Silver, also quite a bit on Pizza Hut, so those are really the two main drivers of our refranchising.

We've done some on Taco Bell and KFC, but the two -- those have been small.

The main drivers have been Pizza Hut and Long John Silver.

As we go forward we will continue to market all of our brands more aggressively but we're pretty happy actually with the progress we made in both the second quarter and the third quarter.

When you add those together, we refranchise about 400 units.

On proceeds, because we shifted to lower priced units, our proceeds may come in a little short of the number that we last threw out there, which I think was about $250 million for the year.

But we still feel pretty comfortable with the overall three-year proceeds of $1.1 billion at this point in time.

Thank you.

Next question, please, Christy.

Your next question comes from the line of David Palmer of UBS.

Thanks.

Your global growth, you said it remained the same, or roughly the same so far in 4Q as it was in the third quarter, I guess throughout your YRI.

I assume you also meant to characterize that for China.

Maybe could you clarify that.

But as you look across your international markets, I'm wondering if could you give examples where maybe there is a bit of a slowdown in demand growth, in a way that sort of feels macro, if you could clarify on that.

Thanks.

First of all, we said global, so we tried to get -- very early in the fourth quarter but we said roughly speaking, China, YRI, in overall US it's roughly same as what we saw in the third quarter.

We have really not seen a lot of macro stuff, probably where we feel it a little bit is in western Europe, but remember, where we are in western Europe is we're in very underpenetrated market for us.

So we're still more focused on development in those markets.

We've seen a little impact, for example, in France but France is still a game for us where we're really trying to drive development.

Where we look at the UK, it's sort of hard for us to read because, we really the same story we've seen over the last couple years.

As KFC continues to perform well there, and we continue to struggle with Pizza Hut, but we think that's sort of unique to us on both brands.

We haven't really felt it there but obvious in the UK you do feel some of the concerns about their economy, similar to what you see in the US.

We just haven't really seen it in our results yet.

Separate follow-up.

Your US business, you are forecasting 8% profit declines there.

That's pretty significant de-leverage, considering you are doing 3% plus blended comps.

KFC, you have seemed to point the finger at that.

Is that all of your profit -- I suppose a bit of a follow-up to some other questions about this, but would you say that's responsible for all the profit declines when you think about the overall US business?

well, we sort of have two major factors, if you look at the full year.

We have the KFC decline and we have the commodity impact.

So the commodity impact, obviously you have $120 million of commodities.

That's impacting.

So normally the sales growth we've had at Taco Bell and Pizza Hut would have generated more profit than what we have so far.

Again, on that front, we expect to catch up on the pricing versus commodity piece in the fourth quarter but it's taken us quite awhile to do that.

So, yeah, it's probably mostly the KFC de-leveraging commodities for the full year.

In the third quarter we had a few other factors.

We had higher utility costs, we had closures in facility actions also produced some downside.

Is there something you would have done -- would you have taken more pricing, or did you feel like you are at the speed limit that you could have taken on pricing this year?

I'm just trying to figure out, a 3.5% comp, negative 8% profit is kind of -- is tough to reconcile, even with the food inflation.

It's one of those things where it seems like an awful lot of de-leverage.

if we had to do probably one thing differently we probably wish we had more value initiatives at KFC.

I think that Pizza Hut and Taco Bell probably played it pretty well in this environment.

We introduced news.

If you say, I'll take each of those brands, Taco Bell, we had the news around Frutista, we also had value with Why Pay More.

At Pizza Hut, we had big news with the pasta introduction.

We also had value with the Mia product.

So I think in those -- we also did some reduced discounting at Pizza Hut.

I think those brands actually played it very well I think what we got hurt on the KFC side, we got a little bit behind on the pricing versus commodity piece.

That's hard, but what we didn't have there is we didn't have the value initiative.

That's why I think the last piece David talked about is important for the brand as well.

We're hoping in 2009 we could get both grilled chicken and hopefully do more on the value side as well.

I think the other thing, David, we don't have a crystal ball on all this stuff.

The commodity pricing kept changing and kept going up and up and up.

So it wasn't like we knew exactly what it was going to be when we started out the year.

We were constant surprise even on the down side on this from a profit perspective.

So I think that's -- that made it difficult to time the pricing that we did take, and that's why we will be catching up some in the fourth quarter.

I actually feel on the US very good about the U.S.

business.

I know it's hard to say that when you are looking at kind of profit quarter that we had, but our sales growth is very good at both Taco Bell and Pizza Hut.

I feel like we've improved our leadership positions at both of those brand.

KFC, while we're having a very difficult year, it is taking the steps to get us set up for a much better year next year so we expect to see a strong turnaround in profits next year at KFC and we are going into next year with Taco Bell and Pizza Hut much better positioned brands.

I think the innovation that we're getting on the sales layers that we talked about is really starting to come into play.

We didn't have a real beverage -- any beverages besides soft drinks at Taco Bell.

Frutista has been an outstanding hit, and we have a number of different flavors that can take us into afternoon snacking and also into desserts, which is something that we're very excited about.

Why Pay More gave us a much better value proposition.

Then when you look at what we're developing, we said we wanted to take the offense on more balanced food offerings.

We're very excited about what we're seeing is in consumer response to Fresco which we feel good about.

We are also looking at how to leverage our asset with dinner.

So we've got some exciting things coming on the dinner front as well.

So all the sales layers that we talked about are really coming into play.

When you look at Pizza Hut, the innovation that we've had on Pizza Hut is absolutely best in class in our industry.

And we really transforming that brand and leveraging our asset which is what we said we'd do.

We started out year with pizza and we said we had new value, now we have Pizza Mia, now we have pasta.

Tuscani Pasta is changing the landscape in our category.

We've already got a $500 million business, marching towards $1 billion in pasta.

Our bold goal is to try to make the pasta business as big as the pizza business.

Consumers love having pasta delivered.

We have a whole line of pastas that we are going to be bringing to the consumer over the next couple years.

So we're not going to war now with just pizza.

We've got pizza and pasta.

Plus our franchisees, they are very excited about WingStreet.

We are adding 100 WingStreets a period, and we're marching towards national advertising, national scale, and we're already the largest wing brand in the United States.

So this is -- when you look at where Pizza Hut was versus where it is today, we are dramatically better positioned for future growth.

Now, what we want to do is take that business that's primarily Friday, Saturday, and Sunday, and move the business into the week.

And we really think that between chicken and we're looking at other ways to market chicken, and pasta, we're going to get that asset leverage throughout the week, not just Friday, Saturday, and Sunday.

So that's -- we're make a lot of progress on the things we said we would do.

Where we have made the the least product that's visible to the customer this year on that front is at KFC.

There is no question about it.

And I've always stead brands that really have their act together in our category are going do well.

The brands that don't have their act together are not going to do so well.

Guess what.

We proved that quite conclusively at KFC this year.

Now, we are taking steps to aggressively get after that on both the value front and most importantly, by really attacking the single biggest issue which is nonfried.

And I think we've done that in a way that's sustainable but the proof is definitely in the pudding on that front, and we will stay tuned.

I'll tell you one things.

I feel very, very good about the fact that we are delivering on our commitment to add sales layers and to leverage our asset and all of our brands.

Everything I just talked about in the US we're doing in spades internationally.

So the sales initiatives that we are putting in place I feel very good about.

And if you want to take good brands and leverage them, I don't -- when you look back at the year I make no apologies for what we've done on building our assets and our sales leverage, and I think we're absolutely changing the face of our business.

You just can't see it right now.

Thank you.

Thanks, David.

Next question, please, Christy.

Your next question comes from the line of Jason West of Deutsche Bank.

Thanks.

Couple quick ones.

Can you remind us the EBIT mix in the US between the three businesses roughly?

I think we disclosed that maybe last December, Jason, and at that point in time Taco Bell was right at about 50% or slightly above that.

I don't recall if we did provide the other two but Pizza Hut is the larger of the two that remain.

Okay, that's helpful.

And then the other one, can you remind what you say charges we're going to see in the fourth quarter and sort of what those are going to entail?

That will be excluded from your operating guidance.

Yeah, it's basically included in the release, is there's going to be an estimated 5% -- a guess, because you have several moving parts.

You have refranchising deals that could or could not close, as well as the restructuring and reinvestment charges, so our best estimate of that is 5% loss in the fourth quarter to yield a total net gain of 3% for the full year.

$0.05 loss in the fourth quarter, net $0.03 gain for the year.

Does that include some expenses for the ovens at KFC as well?

It does include some oven expense.

We'll expect more next year.

Okay.

Thanks a lot.

Thanks, Jason.

Next question, please, Christy.

Your next question comes from the line of Tom Forte of TAG.

Hi.

I had a couple questions on Taco Bell and Pizza Hut.

For Taco Bell, you've talked about the margin impact of the Why Pay More menu.

Can you talk about sales mix, what percentage you are seeing, how this compares with past value menus?

We generally don't give that information out, but as you would expect in that kind of context, it's a very solid mix.

That's about as far as we can go.

Then if you were to gauge the consumers desire for lower priced items versus past periods, would you say it's higher or lower?

It hasn't -- that was a transformational kind of launch.

We took what we had in terms of the Big Bell value menu, previously which also mixed well, and then basically launched Why Pay More to take it to another level, which it did.

So it's hard to say looking for a change in consumer habits versus possible economic impact, hard to read, because we did change our whole proposition on that.

Okay.

I think anybody that looks at the category knows that people are strapped with the dollar and that the value menus are doing well, and that's -- I think that's only more true now.

Great.

And for Pizza Hut can you give us a sense for the Tuscani pasta product, how the margins compare versus the pizza product?

Versus the pure pizza they are slightly above.

Last question, for WingStreet, can you talk about, the on a franchisee level, twee's incremental expense to add a WingStreet to a Pizza Hut location and what's the projected incremental revenue?

The investment will range on the restaurant.

It's probably from the 40 to $70,000 investment.

The total mix is about 10%.

I can't really give you a great incremental number now because we've been launching it over an extended period of time.

Clearly the economics, the reason the franchisees are adding it, it's not a very large investment, and they're pretty happy with the numbers that they are getting so far.

So this has not been -- once we were able to reduce the investment cost, which we did about a year ago, this has been well embraced by the franchisees.

Again, our goal is to be able to get to national advertising by the end of next year.

Great.

Thank you very much.

Thanks.

Next question, please, Christy.

Your next question comes from the line of Fitzhugh Taylor of Thomas Weisel Partners.

I'll be quick.

Looking at the balance sheet is looks like the borrowing capacity at the end of the quarter, is it about $800 million at this point from the current revolver and term loan?

The revolver at the end of the quarter?

All combined.

Beyond the revolver?

Can you clarify?

I thought you had at the end of the second quarter there was about $481 million unused on one revolver, plus an additional 350.

Okay.

Then a 375 term loan.

Right.

The term loan is fully utilized.

In terms of the revolver we do have two revolvers.

A $1.150 billion on basically more of the domestic base, then 350, which is more of an international base.

Total revolver of about $1.5 billion, basically.

At the end of the quarter we had right at about $1 billion of capacity remaining.

Second, you have kind of talked about the $4 billion return to cash -- to shareholders over two years.

That is kind of a 2 billion and 2 billion.

If the opportunity arose, would you load up a little bit more this year given an opportunistic scenario?

Again, as we mentioned, we are going to keep an eight on would we can do in the debt markets and what we want to do in the debt markets.

Clearly times have changed regarding the availability of credit.

So we just have -- like I said, we have to stay flexible and see if that opens up.

As I said before, we really like the price, so we think we're adding shareholder value, being able to buy shares at this price.

Even at the $35 price that we bought so far this year.

So we just to have keep flexibility.

We are going to definitely do the remaining 200 million but we are not going to make any commitments beyond that.

Thank you.

Everything else has been taken care of.

Appreciate it.

Christy, next question.

Next question is a follow-up from the line of Mitch Kaiser of Buckingham.

Great, thanks.

Couple questions on China.

First off, could you give us a sense or can you give us a sense of what chicken costs are up in the third quarter?

We don't have a specific number.

If you call me back later I can get you that.

We gave you the commodity inflation in the release in terms of dollars.

By the end of the fourth quarter you should see some relief, so it sounds like that maybe you haven't seen that yet or are you seeing some of that?

We basically go a couple months at a time, and obvious we carry inventory, so by the end of Q4 we will be buying at next price which is a bit lower than the current price.

Not hugely lower, but it is lower than the existing price so we think that combination plus with the price increase that we took at the end of the third quarter will get us pretty close to home.

Okay, got it.

Separately, on China, was there any profit impact from supply disturbances from the Olympics, and could you quantify that?

Yeah, it was about $1 million.

Got it.

More on China.

I know you don't break out Pizza Hut comps versus KFC, but with the comps deceleration we saw in the quarter that I believe does imply traffic may have been slightly negative.

I was wondering if you could give us a sense, was it more on the Pizza Hut side or the KFC side or a little of both?

Well the one thing I would say is when we -- we always say look at system sales.

Pizza Hut actually added more system sales, added more units than KFC did over the last year, so we're not going to give an exact breakdown, but over the course of the past year, their same-store sales were a bit lower than KFC's, but their unit growth was higher.

Got it.

Lastly, on China, are any minimum wage increases expected now or in '09?

Mitch, as far as everything I know on that, that was all implemented earlier this year.

Got it.

Thanks.

Your final question comes from the line of John Ivankoe of JPMorgan.

Hi, thanks.

As I sit and hear about adding sales layers for 2009, and the G&A cuts or just overall cost spending that you are planning in the US division, for the year, could you help me juxtapose how you can maintain or even increase your operational skills at the store level at a time when adding sales layers and cutting support costs?

It seems like some of these things might be moving in the opposite direction and what kind of attention that you are spending at that time market level to make sure that things actually get better at that time store level and not worse, given the extra complexity and less costs that you plan to assign.

I think first of all, John, that's -- it's always a challenge when you add new items to your menu, but we have a very disciplined process with our franchise operators and company operators along with the restaurant support centers to get everything field ready and ready for our customers.

I think that's one.

We've been working on our nonfried platform at KFC for three years, and so it's only being rolled out because we have an operating platform that people are very confident that we can move forward on.

All of our initiatives have a lot more rigor in terms of test marketing than what we had when we first started our company.

Our field ready process is established and set up, and so I think that -- Well, I know now when we launch something we're not only -- we look at things on the basis of three things.

Is it a consumer win, is it an operations win, and is it a profit win.

So those are the three criteria.

We've got to have three greens on each of those before we roll out anything.

Let me ask you specifically, what exactly are you spending on a net basis $30 million less in 2009, which is obviously more than in that gross dollars in terms of overall G&A?

What is it that you are giving up to save that much money?

We're not giving up our operational capability.

Okay.

I think Rick has given you the areas that we're attacking, but we are not giving up our operating capability.

In fact, we are looking at ways to invest even more next year behind KFC operations, and we are, I think, attacking more of the restaurant support center, nonfield-oriented costs.

Okay.

John, we'll give you a fuller update in December when we have tall plans finalized, and we can show order of magnitude.

Okay.

But the point I was trying to get to, and David, you tried to say that, it's not coming out of operations in any way.

We're not, no.

Okay.

In fact, as I said, we're investing in additional field support at KFC.

okay.

Thank you.

Okay.

With that, let me just briefly wrap it up.

Appreciate everybody coming on the call today.

I'd like to sum it up by saying first our global business is strong with the exception of our KFC US business which we intend to grow in 2009.

International new unit expansion is continuing the at record pace in China and YRI driven by solid customer demand and strong brand unit economics.

Second, the confidence we have in our global portfolio allows us to reaffirm our commitment to 12% EPS growth in 2008, excluding special items, and at least 10% EPS growth in 2009.

In fact, as Rick said earlier, we will have banked well over half of our 2009 EPS growth for 2009 due to the 2008 unit developments in each of our divisions and cost cutting in the US business.

Now, this does not include any benefit from sales initiatives that I have talked about today.

Third, the each of our businesses will generate free cash flow giving us the global capability to finance ourselves in these times of volatile capital markets.

Fourth, we are already deep into preparation for 2009 with extreme focus on maintaining the our pace of international development, rolling out differentiated products and value options in the sales layers I've talked about as well as carefully managing cost, pricing, and G&A.

With all these things underway we are confident we can achieve our growth of at least 10% in 2009 and beyond.

I think one of the things that we're extremely proud of is our track record.

We believe in saying -- in doing what we say.

This is going to be the 7th straight year where we've had earnings per share growth of over 10%.

2009 will be the 8th.

So thank you very much, and appreciate you being on the call.

This concludes today's conference call.

You may now disconnect.