百勝餐飲集團 (YUM) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

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

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

Brands 2009 first quarter earnings conference call.

(Operator instructions) Thank you, I would now like to turn the call over to Mr.

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

Please go ahead, sir.

Thank you, Tina and good morning everyone.

Thanks for joining us today.

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

We are broadcasting the conference call via our web site at www.YUM.com.

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

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 our Safe Harbor statement included in our earnings release last night.

And may continue to be used while this call remains in the active portion of the company's web site at www.YUM.com.

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

investor events where you will have a great opportunity to meet leadership teams from our businesses.

First coming up next we have on June 24th, we will host Pizza Hut investor day in Dallas.

And we will follow the next day with YRI investor day, Yum!

Restaurants International on June 25th also in Dallas.

We will give you a double back-to-back chance to meet with both teams in Dallas.

Then July 29th is KFC investor day in Louisville.

Then August 11 is Taco Bell investor day in Irvine, California.

Please notify us if you plan to attend these events.

Lastly, our next second quarter earnings release will be on Tuesday, July 14.

That is a quick update of our calendar of events coming up.

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

Following remarks from both we will be happy to take your questions.

Now I will turn the call over to David Novak.

Thank you, Tim.

Good morning, everybody.

I am very pleased to report better than expected first quarter EPS growth of 14% before special items.

The power of our global portfolio allowed us to overcome a challenging environment with modest system sales growth of 4% and operating profit growth of 7% prior to foreign currency translation.

Importantly the momentum behind the key driver of our global business, international development, continued with the record 256 new restaurants opened outside the United States, including a first quarter record of 98 new restaurants in mainland China.

Additionally, we generated world wide same-store sales growth of 1%.

The 22nd consecutive quarter of positive same-store sales growth including 2% growth in mainland China and 6% growth in Yum!

Restaurants International, offsetting the decline we had in the United States.

Our operators also improved our world wide margins by more than one point from the benefit of a combination of pricing taken in the second half of last year, managing the details and productivity, and moderating commodity inflation.

Overall, this was a strong start to what everyone knows is a difficult year.

Now let me take you through our key strategies and the results of each of our divisions.

First, let's talk about China where we have the unique strategy to leverage our powerful team and infrastructure to build leading brands in every significant restaurant category, since we're on the ground floor of this important market.

Overall, China continues to be the fastest growing major economy in the world, even as it weathers an obvious bump in the road.

Importantly, I think it is safe to say, based on our results, that our Yum!

China business stands on solid ground, given our strong profitability, powerful new unit economics and the strength of our leading brands.

For the first quarter our China division grossed strong results.

System sales growth was 12% prior to foreign currency translation.

New unit development included 98 new openings in mainland China.

The best start to a year we have ever had.

Additionally, same-store sales growth was plus 2%.

Importantly, our restaurant margin was up 1.7 points.

All of this led to impressive profit growth of 21%, excluding positive foreign currency translation, lapping 23% growth last year.

I am proud of our China team for developed delivery for such a strong quarter in a tough year and at the same time continuing to make investments in our emerging brands.

You may remember in December, that we told you that our China business was planning for a weaker first half of 2009.

We expect that to continue, as we lap 14% same-store sales growth and 38% profit growth in the second quarter.

Rick will go into more detail on these numbers later on.

Now let me give you a little more color on each of our China brands.

KFC continues to lead the western QSR category with nearly 2600 units today, and impressive average unit volumes of $1.4 million.

Which is even more impressive given the fact that the average ticket of about $4 in China, is less than half that of the US level.

We are clearly appealing to the main stream masses in China.

We continue to leverage our new incremental sales layers at KFC including breakfast, delivery and multiple proteins.

Importantly we continue to generate high returns on our KFC new unit development with cash on cash paybacks of just over two years.

Pizza Hut casual dining continues to be the leader in the western casual dining category with 429 units in 107 cities and our closest competitors have less than 30 units.

Pizza Hut is dialing up the dining experience through a broader menu including new entrees with beef, chicken and shrimp, along with more and more beverages and desserts and our Chinese customers are loving the new Pizza Hut.

We're also building new units in more tier 3 cities.

And as I said, we continue to invest behind the development of our emerging brands.

Pizza Hut home service, a new category that we are building, continues to grow and we expect will add over 20 new units this year and add four new cities to our fold.

With East Dawning, our Chinese fast food brand, we have plans to open about ten units this year as we develop the operating platform for large scale and get our unit level economics to where they need to be.

In March, we also announced a new investment in Little Sheep.

The leading chain in China's large high-growth hot pod restaurant category.

The hot pod category is a new category for us and generates an estimated nearly $1 billion of sales in China.

Little Sheep has seen impressive growth since it first opened its doors nine years ago and now has 375 units and a proven management team that will continue to be solely accountable for running the day-to-day operations.

In addition to our portfolio of leading brands we believe we have key long-term strategic advantages in mainland China.

First, an unmatched development team, which we know as the largest on the ground in mainland China.

Importantly, this team has the know how around development in over 550 cities.

We are literally across the country in China and establishing scale everywhere.

Second, we have an unparalleled distribution system which has the capability to bring food and supplies to all these areas of this very large geography that mainland China represents.

Third, we have developed targeted management manufacturing facilities for specific products we serve such as our proprietary egg tart dessert, which is a significant part of our KFC menu mix now.

And finally, we have a strong and very tenured executive management team and a tremendous bench of RGMs that are ready to open new units.

This operating capability gives us the ability to open up restaurants with great returns and give our customers a great experience.

We believe when you combine these strategic advantages with the strengths of our leading brands and the high returns that we have, we are able to have big growth opportunities ahead of us in China, for the long term.

There is no question clearly, that Yum!

is doing its part to stimulate the Chinese economy.

Over the next three years, we plan to invest over $1 billion in new capital in mainland China, build 1,500 new restaurants, and add over 75,000 new jobs to the economy.

China continues to be the largest restaurant opportunity of the 21st century and is clearly a place that we plan on doing business for a long, long, long time.

Now, on to Yum!

Restaurants International, which represents the balance of our international operations, where our strategy is to drive aggressive expansion and build strong brands everywhere.

Here I would like to acknowledge the more than 700 franchisees around the world, which are opening over 95% of our new units and keeping this business on track for profitable growth.

For the first quarter, system sales grew 10% prior to foreign currency translation, including same-store sales growth of 6% and development of 145 new restaurants in more than 45 countries.

Operating profit growth was 4%, excluding foreign currency translation, and was lower than our sales growth.

As expected, primarily due to the lap of a lost tax benefit in Mexico.

I will let Rick Carucci our CFO give you more details with his comments.

The best news for this division was, in addition to the strong new unit openings, was the strong performance in YRI's two largest KFC company markets, the UK and Australia along with our franchise business in Japan.

These more mature businesses generated solid same-store sales growth in the first quarter and show the resilience of the KFC brand, when we're well operated, even in a tough economic environment.

In our Yum!

Restaurants International emerging markets, I want to highlight the great progress our team is making in India where our KFC same-store sales growth was better than 30% for the first quarter, and margins substantially improved vs.

a year ago.

We are absolutely confident we're well on our way to developing proven unit economics that will allow us to reach a scalable business model for KFC.

We are also very excited about introducing Taco Bell into India later this year.

Finally, Yum!

Restaurants International is in the process of rolling out KFC's biggest global initiative to build an incremental new sales layer around its new crushers beverage line.

Crushers was launched first in Australia last year and we're expanding crushers to more countries and more stores this year and expect it to be in about one-third of our YRI KFC system by year end.

Crushers is successfully bringing KFC a new base of products that will allow us to begin building a few line of contemporary beverages that can be enjoyed as snacks and desserts.

At Pizza Hut we're expanding value options at Yum!

Restaurants International, enhancing our dining menus and varieties, which includes the expansion of pastas.

Longer term, we believe that Yum!

Restaurants International is the division with the greatest potential, given the $5 billion people -- 5 billion people -- we would like them to spend $1 billion per person, but 5 billion people in the over 100 countries represented where we have only three restaurants per 1 million people compared to 60 restaurants per 1 million in the US The strength of our over 700 franchise partners and their commitment to building new units should make this our largest division one day.

In fact, our team is working on bold goals to make YRI a $1 billion profit division in the future.

Next let's talk about our US business, where our strategy is to dramatically improve our brand positions, consistency of performance and returns.

Here I am proud of the profit growth our teams are generating and the long-term brand building we're doing even though we have mixed results on sales.

Our first quarter sales in the US were lower than expected as same-store sales declined 2% due to weakness at KFC and Pizza Hut.

Importantly our margins were up due to higher guest checks and moderating commodity inflation, along with productivity measures taken in the restaurants.

We also began to see the benefit of actions we took in late 2008 to reduce our US cost structure.

Overall we were able to generate operating profit growth of 7%.

Taco Bell continues to perform well in this environment even though it faces more pressure, as more and more QSR sandwich chains offer $0.99 value menus.

You will see new fruitista frozen flavors and continued innovation around our, why pay more value platform.

The brand continues to be well positioned for a successful 2009, after a solid first quarter.

Now remember, Taco Bell generates 60% of our US profits.

Pizza Hut performance was impacted by declining dinner sales across the industry, as more consumers chose to cook at home.

We expect the next couple of quarters to be challenging for Pizza Hut in the US as the consumer continues to be under pressure and in part due to the lack of the strong results that Pizza Hut generated last year.

Value continues to play an important role with our customers and is a challenge for us, and so we're currently promoting our PANormous pizza for $10.

While we're slugging it out on sales we're making strategic investments this year to more firmly entrench our Tuscany pasta sales layer and nationally launch our WingStreet line of flavored chicken wings.

We're convinced an arsenal of pizza, pasta and chicken will allow us to leverage our assets more fully throughout the week, which we believe is critical to Pizza Hut's long term success.

The Tuscany pasta sales layer continues to contribute a healthy mix of sales particularly in the early part of week and benefited from the added variety of lasagna.

On the chicken front, WingStreet continues to grow with about 150 new units this quarter and we will be on air with television in the fourth quarter with advertising where we will be talking about the great opportunity for even more variety people can enjoy with Pizza Hut.

There is no question, we will go into 2010, a stronger and more viable brand with better capability to leverage our delivery business and assets.

On to KFC, where there is no question we underperformed this quarter and we were also impacted by weak dinner sales.

Our big new initiative however is to build a new sales layer at KFC and that is with Kentucky grilled chicken which was launched here in the United States.

As the brand's most successfully tested product, Kentucky grilled chicken offers consumers a new way to enjoy the great taste of KFC and will broaden the appeal of the brand.

I want to commend Roger Eaton and the team for the absolutely great job they have done in rallying the system around the KFC's biggest launch of this new product.

We really encourage you to come try the unfried side of KFC, and we hope you enjoy this product as much as our customers tell us they do.

It is absolutely a terrific, terrific product and we're very, very proud of it.

So let me wrap up and put the total of Yum!

Brands' experience into perspective and tell you how I think you should look at Yum!

Brands' performance.

We have clearly gotten off to a better than expected start this year but realize it is early and there is a lot of hard work yet to do.

So don't get ahead of us either for the second quarter or for the full year.

However, I can confidently tell you, that we plan to do what it takes to continue our track record of meeting our target of 10% earnings per share growth this year.

Now let me turn it over to Rick, to give you the financial update.

Thank you, David, and good morning, everyone.

In this section of the call I am going to comment on three areas.

Our first quarter results, our outlook for the second quarter, and our approach for managing our business during the balance of 2009.

As David mentioned, first quarter results came in better than anticipated, as we delivered EPS growth of 14%, excluding special items.

The upside vs.

expectation was driven primarily by strong profit performance in China, strong margins in the US and a favorable tax rate for the quarter.

Please note that reported EPS declined in the first quarter.

This was driven by the sale of a minority interest in KFC Japan in the first quarter of 2008, which resulted in a 0.13% per share gain.

As we have stated previously, EPS excluding special items is more indicative of the performance of our ongoing business.

Now let's dig into the first quarter results, and let's start with China.

China's division system sales grew 12% excluding foreign currency.

We were pleased that division operating profit grew at a healthy 21% excluding Forex.

As David mentioned, this is on top of profit growth excluding Forex in 2008 of 23%.

The strong profit performance was fueled by new restaurant development and strong margins vs.

prior year.

In the first quarter, we opened a record 98 new restaurants in mainland China.

New units continue to meet our high expectations, with projected return on investment of about 30%.

This is an all in return taking into consideration, estimated sales transfers of nearby stores and an allocation of corporate G&A.

Trust me, as long as we continue to expect this type of return, we will continue to rapidly expand in China.

Restaurant margins were 23% in the first quarter or 1.7 points above prior year.

This increase in margin was primarily driven by 2008 pricing action and moderating commodity inflation.

You may recall that throughout 2008 margins were negatively impacted by significant commodity inflation partially offset by pricing.

It is nice to see the commodity environment move in a more favorable direction.

In fact, we now expect $50 million of commodity deflation in China for the full year after a first quarter that saw commodity inflation of $3 million.

Now let's move to Yum!

Restaurants International.

Top line growth remained robust as system sales growth prior to Forex translation was 10% and was driven by same store sales growth of 6% and net unit development of plus 5%.

Importantly, our franchisees continue to lead this growth as they opened 97% of our first quarter new restaurants.

As expected, YRI margins were down one point, primarily due to the loss of our exemption of the Mexican value added tax or VAT, as well as commodity inflation.

Since we lost this VAT exemption in the first quarter of 2008, VAT will not impact our results for the remainder of this year.

YRI completed the first quarter on target by growing operating profit 4%, excluding foreign currency translation and continues to achieve balanced growth driven by our outstanding franchise partners.

However, Forex is having a major impact on this business dampening first quarter profits by $21 million and resulting in lower dollar profits in 2009 than in 2008.

In the United States, same-store sales decline of 2% came in below expectations due to declines of 3% at Pizza Hut and 7% at KFC, partially offset by same-store sales growth of 2% at Taco Bell.

Despite these negative US sales, we saw first quarter US margins grow 80 basis points.

We are seeing an improved commodity environment in the US and in the first quarter we saw commodity inflation of $9 million, which is below our expectations.

For the balance of 2009, we currently expect to see modest commodity deflation.

US profitability in 2009 will benefit from the restructuring which was completed in late 2008 and early 2009.

The $20 million in G&A savings in the first quarter was slightly ahead of schedule mainly due to project timing.

We continue to anticipate $60 million in cost savings for the full year.

We're quite proud of the efforts of our US teams to achieve these productivity improvements.

This blend of restaurant margin improvement and G&A reductions led to operating profit growth of 7% in the US in the first quarter.

Our full-year 2009 profit plan has always been back-end loaded so we're quite satisfied with our first quarter profit performance.

While are planning for a weak consumer atmosphere to persist, we are excited by the recent launch of Kentucky grilled chicken.

This thoroughly tested product has demonstrated the ability to bring in new customers to our restaurants and successfully broaden the appeal of the KFC brand.

Prior to closing the books on the US, I would like to briefly mention that our refranchising program has continued to progress forward.

Although its high-credit markets continue to slow certain transactions, we refranchised over 100 restaurants in the first quarter, predominantly Pizza Huts, and we're on pace to achieve our full-year target of 500 refranchised units.

When you pull it all together, it is great to see each of our divisions achieve profit growth prior to Forex translation in this challenging environment.

The EPS growth of 14% before special items also benefited from a significantly lower tax rate and fewer average diluted shares outstanding.

All in all we were quite pleased with our first quarter results.

Now let's look forward to the second quarter.

We continue to expect the first half of Yum's!

year to be more difficult than the second half.

We expect that the second quarter will likely mark the low point of the year.

This is due to a number of factors that include lapping the all-time low tax rate of 14.8% last year, continued negative impact from foreign currency of nearly $25 million on YRI's operating profit.

Lapping over $10 million in property sales gains and lease terminations, as well as a potential increase in impairment charges, an extremely tough lap in mainland China.

Let's remember that during 2008, the same-store sales comparisons in mainland China were plus 12% in Q1, plus 14% in Q2, plus 5% in Q3, and plus 1% in Q4.

The difficulty of the second quarter lap is typified by last year's March, amazing same-store sales growth of 28% for KFC.

In 2009, March same-store sales growth was negative as we lapsed this incredible performance.

The lapse eased considerably to single digit growth by the end of the second quarter.

While we will likely see negative overall same-store sales in the second quarter in China, we have already begun to see improvement in current trends.

After what we expect will be a challenging second quarter, we will be roughly where we expected to be when we started the year.

Poised for a solid second half due to some easier expected overlaps.

In particular we're overlapping significantly easier sales numbers for our China business as I just outlined.

We expect to experience favorable year-over-year commodity cost upsides.

The introduction of Kentucky grilled chicken, which combined with other initiatives should generate better US sales results.

We expect the negative impact of Forex to moderate during the year, especially in the fourth quarter.

While we have talked about the numbers, it may be useful to review how we are approaching the way we are managing the business during this year.

First of all, we are living in a difficult environment to make forecasts.

As you all know over the past year we have seen huge volatility in the stock market and in commodity markets.

In our restaurant world, it is harder than normal to predict how sales and costs will play out the remaining part of this year.

We are focused on continuing our streak of consecutive years of double digit EPS growth.

I am very proud of how Yum!

managed its costs in the first quarter, and we will continue to run our business assuming it will be a difficult economic environment.

In the slug it out environment that David talked about, we have every expectation our people will meet their cost targets in areas that they can control.

We will not, however, sacrifice our long term growth.

We recognize that one of the things that makes Yum!

special is our global growth.

As we have stated before we believe we have a very long runway for this growth.

Therefore, we will continue to make investments.

As an example, we continue to build new East Dawning units in China and new Taco Bell units in YRI, even though we recognize that these brands will probably not contribute significantly to Yum's!

overall profits for the next 10 years.

The first quarter announcement of a 20% stake in a China hot pod contest is another indication of our long term approach to growth and investment.

We remain very confident of our growth strategies.

We believe we're making strong progress in developing sales layers.

We remain the largest retail developer outside the US and we're strengthening our brands around the globe.

I believe we're doing this in a way that is both consistent with our people oriented culture, and is very mindful of our responsibility to add shareholder value.

I am confident that we will end 2009 with an even stronger and better positioned company.

Now let's open it up to questions and answers.

Great.

Thank you, Rick.

(Operator instructions) Our first question will come from the line of David Palmer with UBS.

Thanks.

Question for you guys in terms of the US business, particularly those dinner-oriented concepts.

It seems like the high price point items these days, even when they are appropriate for a family party, are just turning out to be a very difficult sale.

They are perhaps doing worse than you would have gotten in a test result, even when that test was as recent as 2008, for instance you rolled out lasagna this quarter.

I am wondering how much that puts at risk this grilled chicken rollout that would of course be that same sort of target, multiple party family group that has been so under pressure.

How you're thinking about how in general you will position stuff for the family better to make it work.

Thanks.

Okay.

Well, I think whenever you have a marketing opportunity that's big, it is usually when you solve the biggest problem that occurs most frequently okay.

And the biggest problem that occurs most frequently for KFC is that people are looking for a nonfried option.

So this is a quantum problem that we have got a great solution for.

So, we think this brand -- this product will hold up well in this environment.

The other thing is the team has done a very good job to think about the challenge of dinner, and if you will notice, we're currently launching Kentucky grilled chicken with the two-piece complete meal offering for $3.99.

And people believe this to be a tremendously good value at the low-end.

So we have got a strong low-end value.

The other thing is that we have got break through bucket promotions scheduled because now we give the consumer the choice of both fried and grilled products.

The other thing we have done is we have significantly improved the quality our advertising vs.

tests.

We're basically asking people to unthink KFC.

You think of us primarily as fried chicken.

Well, we're not only fried chicken, that great fried chicken you love, but we now have unfried chicken as well.

And we're challenging America to taste the unfried side of KFC.

So we have got a -- the team has done rallies all around the United States, our team members are very excited about this product.

They have all tried the product.

Our customer complaint -- our customer compliments are coming in at higher levels than any that we have had for any product so we're very excited about this.

It is early in the launch, but we think that this brand or sub brand of KFC, Kentucky grilled chicken will hold up well in this pretty challenging environment for dinner as you pointed out.

Rick, one quick question and I will stop.

With regard to China, are you seeing two-year trends stable or improving in a way that makes you feel pretty confident that the comparisons will bear out and that you're going to get back to positive territory maybe within the second quarter for China, any color there would be great.

What happened in the second quarter as we mentioned it was a very high overlap in total plus 14%.

We had almost unprecedented levels, month-to-month, which we had plus 28% in March, as we said and it actually drops to plus 8% in May on the KFC side.

Over the quarter we probably expect to see similar types of two-year growth.

We are going to see different types of results month-to-month because of the unusual 2008 overlaps.

Okay, thank you.

Thanks David.

Next question please Tina.

Our next question is from the line of Jeffrey Omohundro with Wachovia.

Another question on China.

I wonder if you could just give us a little bit of a broader update on the consumer environment there.

Your sales building initiatives and how you're sustaining your average check in that market, thanks.

You know we really haven't changed our approach that much in China.

One thing to keep in mind is just the impact that we had on pricing and inflation last year.

We had very large commodity inflation on chicken that started in late 2007 that went throughout last year.

That sort of forced us almost, to take pricing in -- throughout the year and always chasing that piece so the impact that pricing had actually moderates throughout the year because we start to unravel, unwind from those price increases that we took in 2008.

But basically, the trends that are different in China are really stuff that David talked about in his speech.

We continue to build sales layers in breakfast delivery and more proteins and you know that is the direction we keep going in and China has continued to broaden our menu and broaden our appeal.

Thanks.

Thanks Jeff.

Next question, please Tina.

Our next question is from the line of Jason West with Deustche Bank.

Yes, thanks, guys.

I just want to touch a little bit on the margin improvement globally and particularly in the US.

I guess I was a little surprised by the strength of the margin rebound, particularly with the negative trends, comp trends in the US and you touched on some productivity initiatives there.

If you just go into a little more detail on what drove the margin improvement and sort of what kind of things you were doing in the first quarter that you weren't doing the last two years.

Well, we have been working hard, yes.

So one of the things that did happen which I mentioned earlier where we did benefit from commodities and the relationship between commodities and pricing, but we have been working hard on the little things, so it is sort of the day-in and day-out pieces.

But you probably also saw some improvement in the labor line.

As an example of that Taco Bell had a get ready in the morning program that simplified the startup of their operations which allowed us then to take labor out and all the brands are doing sort of their versions of that.

And so you know what usually happens in this stuff, it is a bunch of little stuff, but I think part of it is we sort of knew coming into the year we were going to have to be very focused on the cost side.

We got the benefit of not having to chase the pricing commodity piece so now you're seeing that flow all the way through.

I guess it looks like your outlook is a little on the conservative side.

Have you carried through this kind of margin improvement for the rest of the year or were there certain things in the quarter that will be difficult to sustain, maybe with pricing rolling off or something like that.

I'm just trying to understand how to think about the rest of the year on the margin side.

I sort of said it's really hard to predict what the sales and commodity impact will be exactly, so we gave you our best expectations of that in the call.

We're going to keep working on those other little things so I don't know if we will always get as big an impact as we had on the labor side.

On the flip side of that though I expect during the year we may benefit a little bit more on some leases because we are obviously pushing back on lease costs and we will probably get some benefit from that in the later part of the year.

I'm hoping that we continue to get these types of productivity initiatives throughout the year, but we'll see how it plays out.

Okay, thanks guys.

Thanks Jason.

Next question please, Tina.

Our next question comes from Thomas Forte with Telsey Advisory Group

Thank you very much.

I was hoping you could give us an update on, for Pizza Hut in the US and for Kentucky Fried Chicken, what percentage of their sales are from the dinner day part and then when we think about in the US the monthly comp trends, was there a significant difference between January, February, and March?

I think you're looking at the percent of the dinner day part for KFC, I think is around the 65% range - 60% to 65% range.

And I think it would be the same for Pizza Hut in the dine-in business, but it is obviously much higher in the delivery carryout only business.

And then one quick follow-up if I may.

How would you characterize the performance at KFC since the rollout of the value menu?

I think we improved our transactions but we didn't get the overall sales lift that we would have liked to have, because the dinner day part has been so soft for us.

So we're very excited about the new chapter that is just beginning this week.

We expect it to payoff for us.

Great, thank you very much.

I am hopeful that the combination of the grilled and the value will play off each other.

In other words, grill gets some new customers to the restaurants; when they come there, they see we also have the value menu.

So I am hoping that interaction works well throughout the balance of the year.

You know, just to put what we're doing in the US into perspective, I am actually very pleased with the direction that we're heading in all of our brands.

You know as challenging as this time is and this year is, you know KFC, for the first time, we now have a national value menu.

And hats off to Roger Eaton and the team for being able to get the franchisees on board on that and the franchisees are very excited about the direction of the company.

We now have a very valid nonfried product that we're extremely proud of.

So the two biggest issues we had at KFC, which is value and the need for a nonfried option, we have at least got something on the table that we can build from as we go forward.

There is no doubt in my mind that we have positioned our back of the house capability with the addition of ovens.

The focus that we put on operations at KFC, the team has been just relentless at getting our stores clean, getting our staffing right, getting ready for this launch.

So while we're not perfect, we're definitely moving in the right direction from an operating standpoint.

I think we're doing the right things to get KFC set up for more growth in the future.

Pizza Hut which is also being hit by the dinner issue that we've talked about, you know strategically, we're right on the money with what we're doing.

You know we're continuing to fortify our pizza position by improving our product quality with improved ingredients.

We have launched tremendous value initiatives with Pizza Mia and PANormous, but more importantly we're broadening our menu to include both pasta and chicken.

We will be launching WingStreet nationally with national advertising in the fourth quarter of this year.

And there is no doubt as we go forward that pizza plus pasta plus chicken is going to give us a greater opportunity to leverage our assets throughout the week and we're also working on lower priced items that will help us get into the lunch - snacking day part as we go forward.

So the team is very focused on leveraging the assets that we have, which is a huge advantage that we have, and moving away from just being a Friday-Saturday-Sunday business.

So there is no doubt that strategically we're doing the right stuff there.

I think the biggest challenge we have with Pizza Hut is we have to communicate it.

When you stand for pizza for 50 years, I mean, that is what you are, it is hard to overnight get credit for having phenomenal pastas which we have.

And, by the way, the customers are telling us they want this, okay?

And it is hard to get credit for having chicken.

It is going to take time for us to communicate this.

And what we're really pushing for as a team is more provocatively communicating the tremendous transformation that's going on at Pizza Hut.

I am confident the team will do that over time.

Taco Bell which is 60% of our profits in the US is having a very solid year.

We expect it to have a very solid year.

We continue to add to the quality of the menu.

We continue to fortify our why pay more value proposition.

You will be seeing great chicken products that will be introduced in that as we go forward, and we're making our beverage line, Fruitista, even more and more appealing as we think about how we leverage that equipment.

And we're also testing some stuff to really leverage our assets even further.

Everything from breakfast to dinner meals.

A lot of things are going on.

Strategically I am absolutely convinced we're doing the right stuff in the US and there is no doubt in my mind that we will get through this year and be stronger and better as we go into 2010.

So this is a slug it out year clearly.

We're not happy with what is going on with our dinner business, which is Pizza Hut and KFC primarily.

But, I am very happy with the actions that we're taking to build these brands, make them more broadly appealing as we go into the future which is really the must have that we have got to have in the US.

Okay, thanks.

Tina, next question police.

Our next question is from the line of John Glass with Morgan Stanley.

Thanks.

A couple questions.

This thing first with the US, Dave in your comments on Taco Bell.

It does seem as if the brand has slowed sequentially.

I think there was high single digit comps in the back half of last year and I don't know what the year-over-year comparison was, but maybe if you could indicate what that was and if that was one of the issues.

Also are you beginning to lap value or is it a competitive issue?

Why did you see that sequential slowdown at Taco Bell?

I think we have always seen at Taco Bell when everybody gets in the $0.99 value game, which everybody is doing, and gets into that game that has some impact on Taco Bell's business.

We're number one in value.

You know we have built that value.

The consumer tells us we're number one in value.

So no one is better positioned than Taco Bell is from the value front.

But make no mistake about it.

There isn't anybody in the industry, that isn't doing some sort of value menu today and trying to get in that $0.99 or lower game.

That clearly takes some of the fun out of your business even though you're strong as can be.

I think that is exactly what is happening with Taco Bell right now.

We have a very strong platform, the number one platform in value in the category, which is allowing us to get positive same-store sales growth, and we have got the why pay more menu that we're going to be bringing news to as we go forward.

But I characterize this as a slug it out year.

You just got to take the gloves off.

Slug it out.

Take on competition.

Keep building your brands and be strong as hell as you go into 2010.

I am very confident that Taco Bell is doing the right stuff there, but there is no doubt that we've got a lot of competition that's getting into our arena that wasn't there before.

John just from a numbers standpoint, you're right, but last year throughout most of the year we were running about 8% same-store sales growth.

That was due in part from overlapping problems from the previous year.

Going into the year we didn't expect to have that kind of growth rate.

It's probably a little lower than what we would like it to be for the reasons David just talked about.

Then on China.

I appreciate your comments on pricing and how that has helped margins.

Your labor line, though, was the dollars grew at a lesser rate than your units even.

So you have been doing something in the restaurants in China to adjust labor as you have seen sales that were softer year on year.

Also in answering that you talked about commodity deflation of $50 million.

What was your initial expectation for commodity dollar impact?

The margin piece for us on the labor side, the thing that we have done is we have reduced the number of managers in the restaurants, in some of the lower volume restaurants.

And that was sort of a planned initiative that started towards the back end of the year.

I believe we thought that commodities would be about flat when we started the year so we went from flat to an estimate of minus $50 million.

Obviously, what I said about being hard to forecast in this environment, is true.

But the leading reasons for that decline, really the biggest one is chicken, and we've sort of documented the chicken stuff in the past and then the second is oil.

So those are what is driving the $50 million difference.

Thank you.

Thanks John, next question please Tina.

Our next question will come from Greg Badishkanian with Citi.

Great, thanks.

Just two questions.

First, on China besides the difficult compares in March, have you noticed any differences in consumer trends?

Are they trading down or is there anything you're seeing there?

We haven't seen a lot.

Starting towards the end of last year, what we saw a little bit on the trade-down side is a little lower incidence on drinks.

Since then we really haven't seen anything significant.

And April I am assuming picked up a little bit because compares were a little bit easier.

We expect, again, as we sort of said we weakened in March, because we were overlapping the 28th.

April is still a fairly tough overlap then it gets to, I think it was about 20% for KFC, then it gets to plus 8% in May, so it is in May when we will start we think to see an improvement in the trend.

So, you got 28%, 20% and 8%.

That is for KFC.

That is for KFC, which is obviously the mother load in China.

We're overlapping phenomenal performance.

Okay.

Yeah.

You know, good performance last year.

Absolutely.

And on the US side, turn-around with KFC grilled chicken.

Have you gotten early indications from franchisees and customers and in the test markets and based on all that would you expect -- how much type of pickup would you expect once consumers become aware of that new product?

The only thing I can say is that we have got the highest compliments that we have ever received at KFC on any new product.

People are literally calling in and saying we love this product and thank you very much for bringing it into our menu.

So look, we just started the advertising Sunday night.

It is very early days.

But we're very confident that it will improve trends, based on the previous tests that we have done.

And we're even more confident that the KFC brand is going to be a lot better because of it and it gives us a lot more opportunity as we move ahead.

And remember, actually the margins are better on Kentucky grilled chicken than it is on our fried product.

So there is every incentive in the world to sell people a lot of grilled chicken.

Which is something that we haven't had in previous efforts.

Thank you.

Thanks.

Next question please Tina.

Our next question will come from the line of Joe Buckley with Banc of America.

Thank you, couple of questions on China as well.

First, just a clarification on that monthly trend and this may not be the way to look at it, but help me here, if I add up 28%, 20% and 8% and divide by three, I get 18% to 19% same-store sales growth for the second quarter.

I realize those are the KFC numbers, but am I thinking about that the right way is that the KFC compare.

That is the KFC compare only.

That excludes Pizza Hut.

Pizza Hut did not have the same significantly strong numbers.

Pizza Hut last year we had added a lot of units, so they had very modest same-store sales during that period.

Okay.

And then the macro news out of China seems like it is getting better for the last several weeks.

And again I am kind of curious what you're seeing there and your check was up in the quarter.

Do you feel compelled to do discounting?

Are you moving in that direction?

Or just kind of what you're hearing from Sam's team over there in terms on their read on the economy and the consumer.

I think it is definitely a more challenged consumer Joe.

I mean you guys read everything we read what is going on.

The GDP I think last was reported at 6.1%.

Most economists are saying that you're going to have a stronger second half.

Retail sales were up 15%.

Disposable income up 10%.

These are the things that everybody is basically reading and are aware of.

Listen.

What we do at KFC and Pizza Hut and what we have been doing in China is building great brands.

And the great thing is we started these brands from scratch and they are like diamonds, okay.

We just keep polishing the diamond.

What I love about what the team is doing is we're just trying to be more proactive in being ahead of the consumer.

You know we have got shrimp and beef now that we didn't have last year.

We're delivering KFC chicken.

We didn't deliver KFC chicken.

So that is going to be getting us into the dinner day part.

Get us into more office business.

Get us into more convenience.

We're broadening the appeal of the brand.

We now have breakfast in 91% of our stores.

It is still less than 10% of our mix.

We know what the kind of breakfast that McDonald's has built over time.

Well, we're building that breakfast.

And so that gives us lots of upside as we go in the future.

So I think what the team has been very focused on is not overreacting to short-term issues and making sure that we build the overall value of our brand by giving the consumer lots of innovation.

Our strategy at KFC has been innovation.

I have heard some people talk about, well, are street vendors taking business away.

Well, street vendors have been around since the Ming Dynasty, okay?

And we have got -- we don't have any issues with street vendors.

What we have an issue with is making sure that we just keep making our brand stronger.

If you look at Pizza Hut in China.

What we have just done in Pizza Hut is we have added tremendous variety.

Beef proteins, more fish, rice dishes, more beverages, more desserts.

We're trying to make sure that we get even better at delivering five-star quality at a three-star price.

That is what the big brand positioning is there.

And the team is being very proactive because we don't want any casual dining competitor coming into China, and have more of a better casual dining offer than us.

And one of the things we have learned in other parts of the world is that we hung in with just pizza for way too long.

So the team is being very proactive to learn from the past on Pizza Hut and making sure that we really drive the heck out of the Pizza Hut business, by broadening beyond pizza earlier in our life cycle.

So it is a very proactive move.

And then I think we're taking on Pizza Hut home service.

We have got a one number, national call system - that category is coming.

So I think the big message I would like our investors to know about China, is that we're great at brand building in China, and I think that what I commend the team on doing is being proactive at building the brand and broadening the appeal of the menu.

And our value based on the surveys that we do is very, very competitive.

And we don't think we're really taking a backseat to anybody on the value front.

And at the same time, we're obviously opening up the new units.

Which I think as Rick pointed out, we got two-year cash-on-cash pay backs okay.

You got 30% returns including cannibalization.

And it is a pretty nice formula over there, which we don't take for granted.

I think the only thing we can do to screw it up is to not keep building the brand.

That is what the team is really, really focused on.

Joe, if I just had to categorized what we felt from an economic standpoint.

I won't go all the way back to the Ming Dynasty, but just in the last year is that we felt the earthquake last May.

So, we were flying -- you heard about the numbers that we gave you on the same-store sales during the second quarter..

Then we felt again towards the end of the year when had you the whole news from the US, etc.

where the China consumer got a bit more conservative.

We haven't seen a lot of huge swings after that time up or down.

It was never as bad as what people were saying it was going to be, in my judgment.

And you know I haven't seen any huge swings the last few months either.

So I would say those have been the two events that we sort of felt.

Hey, and Joe, just to give you a little more color like on KFC , we're in 25 markets right now with delivery.

We will be going to 60 as we move into the year.

We've got new products coming at breakfast.

Our szechuan beef wrap is now being marketed more aggressively.

You know these are all things -- summer beverages.

We always introduce new summer beverages, that is coming.

So there is a good lineup of activity as we go forward.

Or, let's not call it activity.

How

Hey, just a couple more questions.

The Taco Bell slowdown -- I realize you have a national footprint but I think you skewed in California.

I guess I am curious if California is an issue behind that Taco Bell kind of slowdown.

I wouldn't lay it there.

We have had the same types of trends that other companies have had.

You know, the states that have been tough are the ones that have been tough in housing and the overall economy.

Places like you know, California, Florida, Las Vegas.

But, I don't think at this time is that big a part of our slowdown.

Okay.

Then last question, I guess to Rick.

You know, the guidance left out those two words, at least, that we have become accustomed to hearing and given the big first quarter beat I guess I'm curious why.

I will tell you.

I will answer that.

Okay first of all, in the fourth quarter we said we were going to do 10% and everybody thought we were being way too optimistic, okay?

So if people said you get 10% my God, that will make you one of the few great companies that - in this kind of year.

So, 10%, we will do 10%.

Of course, if we can beat 10% we will beat 10%.

But we just thought it was a great way to take some of the feedback that maybe we were a little too optimistic in the year.

Okay, thank you.

Thanks Joe.

Next question please Tina.

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

Hey, guys thanks.

In the US just going back to Taco Bell for a second, obviously seems as though there is incremental competition there as everybody is going towards this $1 or $0.99 menu.

Given that it is 60% of your profitability, can you just talk us through a little bit of how the profitability of that brand is holding up with 2% same-store sales and I guess related to that, if I back out a big part of the year in the US is the GNA cost -- if I back out the $20 million that you guys reported I think the core business profitability was down 6%.

I think your target is for that to be 6% growth in the year excluding the cost save.

So can you just walk us through kind of what needs to happen from the comp line to get to your goals.

Well, in terms of Taco Bell on the profitability side, we're not going to break that down brand by brand, but Taco Bell because they have the best sales outperformed our total US business.

I mentioned on the margin initiatives, one that I did mention was the Taco Bell initiative in terms of having the morning of startup being more efficient so we are very pleased with the work that's being done there.

Okay.

And as far as kind of the second piece to that the down 6% profit excluding the GNA?

Going to plus-6 for the year?

Well, keep in mind, Steven, the margins were up almost 2 points.

So it was more than just GNA.

The other thing is keep in mind KFC and Pizza Hut comps were negative.

We expect as the year progresses -- I think we mentioned it earlier in the call that we expect especially the second half performance, led by the two that were down, KFC chicken, the grilled chicken launch, we expect some benefits from that.

And we always expected the second half to be stronger.

That is what we said even back in December.

Right.

Always going to be a tough first half.

Okay.

And on the Kentucky grilled chicken launch, as far as year-over-year comparability on media impressions is that significantly higher or are we thinking that ultimately it is the same amount of money being spent, it's just on a new platform?

We have put a lot up against this but I think it is basically within the same budget that we had last year.

If there is any incremental spending behind it.

One thing I would point out to you, though, is that one of the marketing things we will be doing on Monday, April 27 is that we will be making that an unfried day.

And we will be offering a free piece of chicken at every KFC.

All day, any time the restaurant is open.

So we will be encouraging all America to come in and try Kentucky grilled chicken and get a piece of it and enjoy it.

We think it is a product that if we can get it in people's mouths, they will come back and eat it again and again because it stands up to the quality of our original recipe.

And the key here is getting trial and that is what we will be doing.

But we are not making a significant incremental investment from an overall media perspective behind Kentucky grilled chicken.

Okay.

And then just lastly for me.

Sticking with the US , talking about the dinner day part at Pizza Hut and KFC.

You kind of attribute what you think is the competitive move of consumers moving back to the maybe, at-home consumption

Right.

You know.

To what extent do you think some of these casual diners which seem to be moving their menu price points down and that seems to be intensifying further.

How much of that could be playing a role because it doesn't look like it will get much easier.

We haven't quantified that.

Really couldn't quantify that right now.

I always say this, any time anybody starts getting in your arena, it takes the fun out of your business.

Okay?

So, I don't think anybody is walking around saying this is really fun year.

I don't care who you're talking to, okay?

Because everybody is striving to get those sales dollars out there.

Having said that, there is nothing like having great powerful brands and there are two thing that drive your business in any kind of situation like this.

We have done all kinds -- we have looked at every economy and all the history -- you know the brands that are offering great innovation, and offering good relative value, they can do well in these times.

And I am particularly very proud of the performance of Taco Bell.

You know Taco Bell improved their margins.

Taco Bell had positive same-store sales growth overlapping 9% growth last year.

So I think Taco Bell had a pretty damn good quarter and we think Taco Bell is going to have a pretty good year.

KFC and Pizza Hut have not had enough true innovation or enough value to separate themselves from the rest of the pack.

And as I have said before, that is when your results languish.

And I think KFC's challenge is to make sure we launch Kentucky grilled chicken well and get trial on that product and I think the numbers will reverse in spite of the fact that people are eating or cooking more at home.

I think if we do the job and do it well and this product is as good as we think it is we will be able to report some good results.

And that is what our intent.

I think our challenge at Pizza Hut is that our product innovation is a lot better than our marketing because we're not getting enough credit for the fact that we got unbelievable pastas at incredible value and our pizzas are in the same vein.

So we have got to really start marketing the transformation that is going on there so the consumer really gets it.

Because right now I think we stand primarily for pizza vs.

pizza and the pastas we have.

And we have to build an awareness of wing street in the fourth quarter when we launch that brand with national advertising, which I think because it is real innovation we will see positive results from that.

So, you know, we don't really have a lot of stories to tell around here.

I mean, the bottom line, this is like, what are we doing, okay, to win in the market place.

And I think we did enough to win with Taco Bell in the first quarter and not enough to win with KFC and Pizza Hut in the first quarter, and hopefully we will be able to make more progress as we move through the year.

Thank you.

Thanks Steven.

Next question please.

Our next question will come from the line of Jeffrey Bernstein with Barclays Capital.

Thank you.

As we think about the back after half of the year being presumably getting better being more second half weighted.

If it was necessary that you needed more leverage to drive the 10% less EPS growth, I just wondered if you see the GNA opportunity as potentially more meaningful.

Seems you kept the $60 million you achieved 20 sooner than you thought.

Whether there was upside there or whether you would reconsider share of purchase as we move half way who the year with cash accumulating.

Wonder wearing the potential leverage you might have there.

We're not planning any other major actions at this time.

So I think it is the actions we have taken will be where we're at.

I think $60 million is still a pretty good number.

What I said before, though, when we each have our budgets given that we have said it is a slug it out year, I don't think anyone's going to miss their numbers.

There may be small upsides to that number but I wouldn't assume anything significant.

Jeff, on commodity, inflation, we did have some, but keep in mind, from a US perspective, we had I think about $8 million of inflation in Q1 in the US and we will probably have just a little bit in Q2 and then Q3, and Q4, the back half is definitely deflation.

So even though had you a pretty significant benefit in Q1 there is still a pretty good swing from first half to second half in that category as well.

For the US cost of goods that already saw over 100 basis points of favorability this quarter would only seem to accelerate in terms of additional favorability in the rest of the year.

In terms of commodity inflation the best year-over-year will probably be Q3.

So you will have a little bit of inflation this quarter.

A little bit less next quarter, but still some inflation, and then the back half will be all deflation.

So there will still be continuing benefit.

And the potential for share purchase?

I know you talked about reconsidering it through the year.

Is that something you would do at this point or are you still looking to stockpile cash.

We're very focused on strengthening our balance sheet in very tough financial times and we have no plans for share buyback at this point in time for this year.

No plans at least.

We're always evaluating that.

But we will be in the second half focused on debt reduction.

And just on China, just wondering, keep going full speed ahead, which seems to be the right approach for you I am just wondering whether you're seeing disparity by tier.

I know you said you change your growth plans periodically just based on tier 1 vs.

tier 6.

Just wondering if you are seeing disparity in terms of results there that would lead you to change your growth plans or have a different tier stack.

Over time what has occurred is that we have probably been going into the year a little more aggressive on the lower tiered places and a little bit more conservative on the top tier cities.

Especially on the Pizza Hut side.

On the KFC side we are looking at probably some shifts, not necessarily by tier but geographically depending on sort of the impact on the export business.

But those are not hugely significant.

But there will be some adjusting that occurs there..

Are you seeing the southern markets be weaker than the northern or was that by geography what you mean by that?

Eastern and southern are a bit weaker.

They tend to be the areas that have impacted more on the export reduction.

Yes, our southern markets are definitely several points below the market average.

Which is what you would expect.

Okay.

Which I think only, in its own way, kind of points out a strength of our China business because we're so dispersed throughout the country and in 500 cities and we can go where the fish are really biting.

As Rick said earlier we are looking at the central and west as, I am sure you've read, the government is spending a lot more money infrastructure-wise in the central and west part of the country.

We have representation there already because of our distribution system that can that I us anywhere.

And we're going to continue to leverage that as Rick said.

Okay.

And then just lastly, the KFC with the grilled product I think you said at the analysts day, that I guess in test market it was doing something like an initial 8% lift to sales and I thought you would be able to capture or keep 4% of that or half of that over time?

Is that still a reasonable assumption layering it on top of what your current comp trends are.

I think we said what we're going to say about the grilled.

You know, again, a lot of things have changed in terms of where the base business was, etc.

so obviously the next call will have a lot more to say on the results.

Thank you.

Next question please Tina.

Our next question will come from the line of Steve West with Stifel, Nicolaus.

Quick question on the grilled chicken sales and following up on that last question.

What are the sales trend that you did see in the test markets.

Was there a big spike when you were supporting it with TV advertising followed by subsequent pullback.

It seems like that is what I have seen in a couple of test markets I have seen out there.

What we saw is we saw a decent spike but it was actually a building spike.

It wasn't the way some promotion where the first week or two weeks is the strongest.

Actually built more than some of our other promotions did and then we had several test markets.

And it helped at different times half its value as we took it off but then we pulsed it as well with some smaller advertising thereafter.

So again I think this is going to be quite different for some of the reasons David talked about and that we're putting a very big the effort against it right now, with different types types of advertising and my guess is even the way we decide to pulse future advertising, may be a bit different than the test.

But the thing that was good about the test is a decent chunk of it stayed on even with very limited advertising.

And clearly our goal is to make this not just a permanent part of the menu, but a significant part of the menu for a long time.

Okay.

Then one last question on there.

Have you gotten any kind of consumer feedback on, I know the chicken tastes great but it is smaller.

So I was wondering in its value environment are you getting any consumer pushback on paying the same price for what appears to be a smaller piece of chicken.

I think consumers generally knowledge it is smaller because there isn't breading on the chicken.

We have had in some isolated markets, some issues with piece size.

Which we have gotten all over and it is mainly where products might not have been in the spec range.

We're very well aware of that.

But we have not had any be abnormal complaints.

In fact what we are getting are abnormal compliments.

We're getting more compliments at KFC than we have ever had in our history on any product.

I would add since I have KFC background, I am even getting compliments from the buy side community.

From folks already trying it.

I have never gotten that before.

Well, those guys don't have a heart.

Just kidding.

Next question please.

Our next question will come from the line of David Tarantino with Robert W Baird.

Hi, Good morning, and congratulations on a good start to the year.

Question on the outlook, maybe this is for Rick.

What type of comps do you think you need to get to a 10% EPS growth number for the year given all the improvements you're seeing in the cost outlook.

I couldn't begin to answer that exactly.

Because obviously, you know so much depends on China and the YRI and not just the US.

But what we are assuming in general is because of the commodity pieces, we can do with lower sales than normal.

Normally we say same-store sales in the 2 to 3 range.

We could do probably several points below that in this commodity environment and get to, you know, where we want to get to.

But obviously it depends on a lot of factors, but that is sort of one thing to think about.

Probably throughout the globe I still think China as well, we can probably get there with a couple points less than normal if the commodity situation holds the way we have sort of talked about it today.

Couple points for the full year.

Great.

Very helpful.

And a question on the YRI business which was very strong on the top line and you mentioned a few countries in particular, the UK and Japan, and Australia, are you seeing the economies in those markets start to rebound and improve or are you doing something specifically to drive the business there?

Actually, I was talking to Albert Bilotti, who is doing a great job running our Australian business last night.

Actually the economy is looking tougher there.

Unemployment is projected to get higher.

So I think what we have in our global markets is one of the big advantages that I think we have is we have less competition.

When we look at global brands, you're looking at McDonald's, Pizza Hut and KFC primarily in most markets you can add Burger King and Domino's and other markets but you don't have the tremendous proliferation of chains that you have in the United States there.

So when people say, well, you ought to be doing better in a tough economy I think it is better to do better in a tough economy when you have less competition.

But I also can tell you that we have had tremendous innovation in Australia, Japan, and the UK on a relative basis.

And it goes back to that formula I was talking about earlier.

You know when we're doing our job we do well.

I think it is a combination of us doing our job well plus less competition I think allows us to be successful there.

Great, thank you.

Thank you, next question please Tina.

Our next question will come from the line of Fitzhugh Taylor with Thomas Weisel Partners.

Thanks guys I will be brief.

I had more of a longer term question.

You mentioned India earlier in the call.

You know there are obviously a lot of similarities from population and unit growth opportunities with China.

I was wondering if you -- how much you have considered maybe an owned infrastructure and owned unit system there similar to China vs.

the typical franchise YRI model.

I think we -- we're looking at balanced approach in India.

Not as dramatic as what we have in China, which is primarily all equity.

What we are doing right now is we're investing equity to get KFC and Taco Bell established.

Pizza Hut there is basically 100% franchise.

What we think we will have over time in India is a balance between equity and franchise, both KFC and Taco Bell.

So we are very optimistic about India because our brands are being so well received, people like the food so much.

We actually think that Taco Bell may have the highest degree of opportunities in India because of the great vegetarian products, you know, the carrier, the spiciness of the food, which we can even modify to be more relevant to the Indian taste.

These are brands, both KFC and Taco Bell that we're very well prepared to invest equity in.

But at the same time we think we will have a balance between equity and franchise long term in India.

And Fitzhugh regarding your question on distribution, in China we got into that.

Obviously, the economy -- when we got there but you didn't have a lot professional distribution, that we thought had the ability to get national scale quickly that could handle things like refrigeration, etc.

In India there actually are a couple of very professional distributors already established there so there is really not the need to do that.

Thanks.

Next question please.

Our next question will come from the line of Mitch [Pfizer] with Buckingham Research.

Thanks very much.

First off, just on YRI with comps up 6%, is that a system wide comp or a company operated comp.

That is system wide, Mitch.

Okay, great, can you give us just some of the highlights and low light on that 6%.

It was particularly strong.

Was there anything that was particularly weak or just above average?

I would say, first of all, we have got some detail in the release in terms of geography.

Nothing really jumps out of the page.

One of the things that I have been pleasantly pleased and surprised with is just the number of countries that we have had that are positive.

I mean, whenever you obviously have a global business in the 100 countries we have large a number of them, usually up and down at a point in time.

Probably for the last year and a half we have had an abnormally large percentage be up.

And that has sort of been holding up pretty well.

Our weakest markets, have probably been - that impact us the most have been a couple of our equity markets.

Mexico and Pizza Hut Korea.

We haven't seen a big trend change in those businesses.

They have been an issue for the last year or so.

Okay, great.

And just on KFC US, I think last quarter quarter you may have mentioned a comps target of 7% for the year.

Are you revising that target at all?

What I should have said before is our expectation is probably a couple of points lower, at least in the US for the full year, but we haven't sort of broken that out by brands yet.

That is because of Q1 being below what we expected.

Okay.

And the China comp target of 5% is still on track at this point?

We're going to update our numbers at the next release.

Sort of across the business.

Again early to try to make the full-year call changes at this point.

But again, you know, probably we expect China to be worse than what we thought in the first half but we still feel pretty good about what we thought would happen in the second half.

Okay.

And my last question just on the US cost savings.

The $20 million that happened a little sooner than expected, could you just identify maybe some of the bigger buckets, in that $20 million?

Well, the $20 million, the overall piece, most of it we did expect was due to head count reductions associated with the restructuring that we did to our business.

The extra amount is just that we had some projects timing, across the board that -- is some of that money will be spent later in the year, but again a large part ow what we did expect is just a little higher than what we thought it would be.

Great, thanks.

Thanks Mitch, next question please Tina.

Our next question will come from the line of John Ivankoe with JPMorgan.

Thanks, John Ivankoe.

Question on YRI if I may.

Obviously the division did not participate in the commodity improvement of the store level cost management as did the other divisions and that isn't even excluding the Mexico VAT change.

If you could talk whether through the rest of 2009 or going into next year what could change that.

Is it just a matter of focusing on those numbers.

And secondly do you think your G & A is structured correctly in dollars, for YRI, especially given the fact that I guess you said 95% of your growth is from franchisees?

Well, first piece of it, you're right the commodities and YRI are different than US and China.

There are a couple of reasons for it.

First of all, YRI tends to have longer term contracts.

So we did not get as big a downside, nearly as big a downside in YRI last year.

Because we were locked in on longer term contracts in 2008 than we experienced in the US and China.

We're sort of getting the reverse of that this year as we did lock in some of the longer term contracts be in 2008.

Before sort of the commodities came down so, we were locking in higher costs for 2009, YRI.

So, YRI will sort of be the reverse after the US and China was, but that they weren't impacted too much, this year, we expect them to not get the benefit, this year, though as well.

In fact, they will probably get more of that benefit in 2010 if things stay low, so that is one piece of it.

The second dynamic on the YRI piece that is a fair number of the costs, especially of a couple of our equity markets, Japan and Korea and Mexico were either US-based or influenced strongly by the US dollar.

So we are getting some commodity inflation, due to that, in some of our equity businesses.

So, we expect commodity increases at YRI to get slightly less as the year unfolds.

So we expect less of an increase in the balance of 2009 than we saw in the first quarter but we still expect overall increases of YRI.

Okay.

That is helpful.

And on G & A I mean that hasn't been a focus for you guys.

I mean the US has and the money you're taking out is significant.

Is there a similar type of thought that you might be able to put to work at YRI.

YRI has been again -- let's remember with the US piece that was relevant was the refranchising, right?

So it takes fewer resources to manage a franchised restaurant than it does a company-owned restaurant.

That is really what drove the US piece of it.

YRI ownership percentage has been there, again it goes up and down slightly.

But it has pretty much stayed where it has been for awhile.

So, the only time we expect to see anything on the G & A side is if we can franchise things in the market which in the scheme things won't make a huge difference in the overall number.

And clearly we are investing in some of the growth markets like India, France, etc., where we're building up longer term businesses, and those countries when they are start-ups do you have a little bit more as a percentage of sales on G & A.

We will get some benefit of G & A leverage down the road as those markets become more mature.

Great, helpful.

Next question please Tina.

Our next question is from the line of Keith Siegner with Credit Suisse.

Quick question on Pizza Hut.

We talked about the strategy, we talked about one of the biggest challenges being communicating the changes in product offerings.

You know as you think about this year we have wing street coming in fourth quarter.

You have got the PANourmous and you are lapping last year's pasta hut introduction.

How should we think about the marketing budget for this year.

How you improve that awareness and communicate those changes maybe.

How do you approach the marketing budget for the balance of this year pre that fourth quarter introduction.

And maybe what you do with pricing and promotional effort to help as well.

We aren't spending incrementally.

We've got significant budgets because we have built into our contracts, both company and franchise stores and the advertising is more of a fixed cost.

What the team is doing is they are focused on layers, tiered spending.

Making sure that we spend on pasta and pizza simultaneously and then when we launch wing street, it will be supported with money that has been put into the budget, basically as a percent of wing street sales.

I would look at the way that we spend on the market to brand more on a layered basis or a tiered basis.

One quick question for Rick.

In China, one of the things we talked about back at the analysts day and the original guidance for the year was the opportunity for G&A leverage in this model going forward.

And you know despite the profit, upside in the quarter, actually G&A was pretty much flat as a percent of sales year-over-year.

There really wasn't a lot of leverage.

How should we think about the -- given the potentially weaker first half sales environment, potential for G&A leverage in China this year.

Well, what we have said is that if you look at our broad model, that in the past, we have not gotten G&A, leverage.

So if you look at how we have gotten sales and profits in the past, it was pretty much led by unit development.

We expect still unit development to take the largest part of our growth, but what we said would occur over time is as we get a little more from two areas.

One pricing which we have already started to do, that was led by an unusual chicken costs increase as they said a year and a half ago.

So we expect to get modest pricing and we also said we should start to see some G&A leverage.

I think we had about a point leverage in the first quarter.

So, we saw a little bit of it coming.

But I think where we're going to get it is still going to be over time.

It doesn't have to be a huge amount of money.

Don't forget we're continuing to invest in start-up brands like East Dawning and Pizza at home service.

But we are starting to see a little bit of leverage on the KFC side.

I expect that leverage to hopefully grow a little bit over time.

We did in total revenues, Keith, we were up 19% and our G&A was up 16%.

We did get a little leverage.

The gross was less than revenues.

That is definitely a little better than in the past.

Also keep in mind we're lapping leap year which impacted the top line by a couple points.

Okay.

Thanks.

Thanks Keith, next question please Tina.

And we have no further questions at this time, sir.

Do you have any closing remarks?

Yes, I will just briefly wrap up here.

First, our China business, is on solid ground and continues to grow as we build leading brands and develop new units with high returns.

We believe the Chinese economy is stabilizing and remember, China is still the number one restaurant opportunity for the 21st century and we're very well positioned there.

Second, Yum!

Restaurants International, continues to be the division that we think has the greatest long-term potential for Yum!

brands.

And continues to produce consistent results with the strength of its broad-based business in over 110 countries with 700 franchisees.

Third, our US business is now set up with a more efficient operating structure, and is focused on executing new incremental sales layers that we have talked about and our ownership strategy.

We expect to make -- with the moves that we're making this year to strengthen our brand.

We expect each one of our brands to go into 2010, stronger and better positioned more with opportunities to leverage the assets that we have.

And finally, we expect to generate a huge amount of cash coming from each of our divisions as we grow our business and maintain our industry leading return on invested capital.

And with all of these things we expect to -- we can achieve our EPS growth target of 10% in 2009, and beyond.

I want to emphasize that the second quarter will be our toughest quarter, but we expect a very good second half performance.

So with that, I will close and thank you all for being on the call and go out and try Kentucky grilled chicken and the unfried side of KFC.

Appreciate it.

Ladies and gentlemen this does conclude today's teleconference.

You may all disconnect.