百勝餐飲集團 (YUM) 2010 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the 2010 first-quarter earnings conference call.

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

(Operator instructions).

At this time I would like to turn today's conference over to Mr.

Tim Jerzyk, Senior Vice President, Investor Relations.

Thank you, Mr.

Jerzyk.

You may begin your conference.

Thank you, Janice, and good morning, everyone.

Thanks for joining us on the call.

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

We are broadcasting the conference call via our website, www.Yum.com.

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

I would also like to advise that this conference call includes forward-looking statements that reflect management's expectations based on currently available data.

However, actual results are subject to future events and uncertainties.

The information in this conference call related to projections or other forward-looking statements may be relied on subject to the Safe Harbor statement included in our earnings release last night, and they continue to be used while this call remains in the active portion of the Company's website at www.Yum.com.

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

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

May 18, we will host YRI Investor Day in Dallas, followed by Pizza Hut Investor Day on May 19, also in Dallas.

Space is limited, so please notify us if you plan to attend these great events.

Also, on Tuesday, July 13, our second-quarter earnings will be released and a conference call will follow and will be held the next morning on July 14.

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

Following remarks from both, we will take your questions.

Now I will turn the call over to David Novak.

Okay, thanks, Tim, and good morning, everyone.

I'm pleased that, based on our strong first-quarter performance, we're well on our way to achieving our ninth straight year of achieving our annual target of at least 10% EPS growth.

Our first-quarter worldwide operating profit grew by 17% and EPS increased 23% before special items.

We are particularly pleased with our business in China, which reported robust profit growth of 37% driven by both strong unit development and same-store sales growth.

In the United States we were also pleased to see the significant sales improvement from the low point of the fourth quarter, particularly at Pizza Hut.

However, US profits were down 9% and same-store sales declined 1%.

At Yum!

Restaurants International, we increased system sales by 1% and profits by 2% prior to foreign currency translation, primarily due to new unit development.

While clearly we have more work to do, overall we were pleased with this start to 2010.

Now let me take you through our key strategies and trends for each of our divisions.

First let's talk about China, where we continue to build leading brands in every significant restaurant category.

We are particularly pleased with the performance in our China business.

Same-store sales grew by 4% and units expanded 14%, while restaurant margins were at a record level of nearly 27%.

All combined to generate robust profit growth of 37%.

This is particularly impressive when you consider that we were lapping 30% profit growth in the first quarter of last year.

New unit development continues to be the major driver of our growth and we remain the largest US retail developer in China.

We opened up 96 new units this quarter, and our China new unit returns continue to be the best in our business.

In terms of scale we surpassed 3500 units, strengthening our leading position in the world's largest growth market.

KFC is our largest brand in China, with nearly 3000 units in over 650 cities with superior average unit volumes of $1.4 million per year.

We are continuing to grow our business and leverage our assets.

A key KFC initiative is delivery, which is now available in over 110 cities and nearly 1000 units.

This is proving to be a developing sales layer for us, now representing over 3% of sales.

KFC breakfast is another way we are leveraging our assets, as we now have national distribution.

KFC breakfast represents nearly 7% of transactions and continues to steadily grow.

Importantly, KFC continues to build its leading image in China across key brand measures.

Pizza Hut casual dining continues to be the leading Western casual dining concept in China with 467 units in 122 cities.

Our new menu strategy continues to drive double-digit same-store sales growth.

We offer a broad variety of entrees including beef, chicken and rice dishes along with appetizers, beverages and desserts.

Amazingly, we are actually updating 25% of our menu every six months with new products to keep the concept fresh and relevant.

We are having solid success building a true casual dining concept with everyday affordable value.

We also continue an investment behind the development of our emerging brands.

Pizza Hut home service in the home delivery category now has over 100 units in 11 cities and East Dawning, our Chinese fast food brand, continues to progress as we drive for scalable economics.

Next, Yum!

Restaurants International, where our strategy is to drive aggressive expansion and build strong brands everywhere outside of China.

New unit development which, like China, is a key driver of growth for this business and continued with 109 openings this quarter in more than 40 countries.

Approximately 90% of this growth came from our strong network of around 1000 franchisees.

We expect to deliver our goal of adding about 900 new units for the full year.

Our first-quarter same-store sales declined 1% after adjusting for timing of Chinese New Year's.

Overall, we drove 2% operating profit growth excluding foreign currency translation for the quarter.

KFC is focusing its attention on driving value around the world to build sales momentum in what remains a somewhat challenging consumer environment.

We are expanding our value menu to more markets using proven strategies that have been very successful in markets like South Africa and the United Kingdom.

Additionally, we continue to build our new incremental sales layers.

Our Krushers line of frozen beverages continues to expand and is now available in over 2000 units in over 25 countries.

Our KFC breakfast initiative we call KFC AM also continues to grow with nearly 400 units in four markets.

Pizza Hut continues to make progress at elevating its brand offering and shrinking strengthening its position as the leading Western casual dining concept with everyday affordable prices.

While we have weaker transaction trends due to Pizza Hut's higher average guest check, we are encouraged by the progress we're making with our expanded menu including a wider variety of appetizers, beverages, entrees and desserts.

Yum!

Restaurants International's new growth markets, France, India and Russia, delivered 14% system sales growth prior to foreign currency translation this quarter.

KFC France opened its 100th unit and is moving towards having the scale to ultimately have national television advertising.

We expect this will drive further brand awareness, particularly in the provincial cities.

In Russia we continue to drive sales growth in KFC Rosticks units and now have over 150 units in 22 cities.

Our business in India continues to perform well with solid same-store sales growth and new unit expansion.

We now have 74 KFCs in 13 cities and 159 Pizza Huts in 33 cities.

KFC is now leveraging television advertising to build brand awareness and promote new products in India.

Taco Bell International continues to expand with our first unit in Bangalore, India, in that country's largest mall, Mantri mall.

You might have read in the Wall Street Journal that our initial sales at this store has been extremely strong and transactions have actually exceeded 1000 per day.

The results from other recent openings in Spain, Dubai, Cyprus and Panama have also been very encouraging with our stores comfortably exceeding sales targets.

Looking ahead, we are on track to open two new Taco Bell units in London in the second quarter and expect to open new markets like Korea, Kuwait, Peru and Colombia later this year.

Next, onto our US business, where our focus is to improve our brand positions, consistency and returns.

As we noted in our earnings release, performance in our US business for the first quarter was relatively weak with same-store sales down 1% and operating profit down 9%.

But, we were pleased with significant improvement from the fourth quarter of 2009.

Pizza Hut led the way with 5% same-store sales growth, driven by the success of the $10 Any Way You Want It promotion.

There is no doubt America loves Pizza Hut pizzas, so this has addressed our number one problem -- we were simply too expensive.

And now we are working on ways to sustain this value.

Going forward, we're also striving to transform Pizza Hut from just pizza to pizza, pasta and wings.

Tuscani Tuesday's offers consumers Pizza Hut's pastas at a great value of $10, and Wing Wednesday's offers consumers Pizza Hut's award winning chicken wings, also a great value.

Pizza Hut has clearly turned the corner on sales trends.

At Taco Bell, we were disappointed with the 2% decline in same-store sales but encouraged by the fact that our transactions were positive for the quarter.

We had experienced some trade-down with less drink and combo incidents.

Taco Bell's pipeline of products is strong for the balance of the year, focusing on value to the consumer in a market clearly focused on everyday low prices.

KFC's performance improved sequentially, but we still have our work cut out for us.

We are focused on three key areas as we turn the brand around -- balanced options, featuring Kentucky Grilled Chicken, portable product innovation like the new Double Down Sandwich made from two boneless fillets, grilled or fried, and improved operations.

Overall, our US performance has improved from the low point of the fourth quarter.

We expect this trend to continue, especially as we move into the second half of the year, both in terms of our top-line sales and profit performance.

One other note -- I'm sure you also noticed from our release that we took a non-cash charge that basically reflects the beginning of refranchising KFC to 5% ownership.

That is also our goal for Pizza Hut, where we have already begun the journey and are well on our way.

So let me wrap up the first quarter overall by saying we're off to a strong start in 2010.

While the global operating environment remains challenging, we are especially pleased with the strong performance in our China business and the improving trends we're seeing in our US business, which we expect to continue to build as the year progresses.

We're confident we are well on our way to delivering another year of at least 10% earnings per share growth, which will be our ninth year in a row of meeting or exceeding this target.

Note me turn it over to Rick Carucci, our Chief Financial Officer.

Thank you, Dave, and good morning.

In the section of our call, I'm going to comment on three areas -- our first quarter results, our outlook for the business during the balance of 2010 and our strategy in emerging markets.

As David mentioned, we are very excited about our first quarter results.

I'm sure any CFO will tell you that they would much prefer a strong start to having to play catch-up.

As we review a few of our highlights, let's start with China.

We had a very strong Chinese new year holiday.

This led the first quarter system sales growth of 15%, including same-store sales growth of 4%.

Sales were solid across the country including the high export regions.

While we are not yet ready to say that the Chinese consumer has fully recovered, we are starting to see signs that the consumer environment is improving.

As an example, consumer confidence in China has increased year-over-year the last three months.

A big driver of sales continues to be our development results in China.

New unit economics remain strong and we expect that we will continue to expand broadly across China.

Our profit growth of 37% was also driven by record first-quarter margins as we benefited significantly from chicken cost deflation versus prior year and lower than trend wage inflation.

Now onto Yum!

Restaurants International.

Overall, our sales results were relatively weak in our large developed markets like Japan and Canada as well as equity businesses like Australia and Mexico.

These markets dampened the overall sales results for YRI in the quarter.

The good news is that YRI still benefited from broad-based new unit development of 3% in the first quarter.

However, this led to only 2% profit growth prior to currency translation.

We did benefit from a $14 million ForEx upside in the first quarter, which resulted in YRI reported profit growth of 13%.

Next, in the US, we continue to battle high unemployment and an industry focus on value.

However, our US business realized significantly better sales performance than we saw in the fourth quarter.

On the whole, our US restaurant margin declined 90 basis points versus prior year, primarily due to the decline in same-store sales.

Commodity deflation of $5 million was offset by a modest impact from sales mix shift.

For example, Taco Bell experienced a higher mix on the Why Pay More menu and had lower drink incidence.

While trying to improve our value offerings, we also manage our business with tight cost management.

In the US we reduced our G&A by $6 million.

When you pull it all together, we are pleased with where we stand after the first quarter.

Now let me share with you some of our thoughts for the remainder of 2010.

We expect our second-quarter sales dynamics to be similar to the first quarter for our divisions.

We expect moderate same-store sales growth in China in the second quarter.

For the US in the second half of the year we expect positive sales growth.

A key reason is that our comparisons versus prior year get significantly easier.

Remember, we are lapping a second half where US sales were down 7% in 2009.

We do not expect China's exceptional margin performance in the first quarter to continue.

We expect some commodity inflation in the back half of the year, and we also forecast greater impact from wage inflation.

Wage inflation was lower than normal in 2009, and is significantly picking up again in 2010.

For the full year we expect moderate year-over-year margin improvement over last year's 21% margins in mainland China.

Our after-tax results in the second quarter will be challenged as we roll over a 16.4% effective tax rate before special items from the second quarter of 2009.

Special items are very difficult to predict and can be quite lumpy.

However, this year it appears that we have more downsides than upsides.

During the first quarter we took a special items charge that included a $56 million expense from US refranchising.

This includes gains from the sale of 46 restaurants sold in the first quarter.

This also reflects that we've floated for sale a significant number of KFC US company units.

Our accounting policy is to recognize a non-cash write-off for potential losses from refranchising when units are offered for sale.

In the second quarter we will also lap a $68 million one-time non-cash gain in 2009 related to increasing our ownership in the KFC Shanghai joint venture.

Overall, as David said, we are confident we are on track to meeting our objective of at least 10% earnings per share growth.

As we have shared with you before, one of Yum!'s unique strengths is our presence in emerging markets.

Today I'd like to give you a few more insights into this significant growth opportunity.

Emerging markets as defined by World Bank's guidelines generally includes countries whose gross national income per capita is less than $12,000.

This group includes countries like China, Indonesia, Malaysia, India, Russia, Vietnam and Brazil, all of which have near or over 100 Yum!

restaurants.

The good news is that collectively these emerging markets are growing their economies at a fast rate.

With the booming middle-class population in emerging markets we strongly believe there is a long runway for restaurant growth in those countries.

As you may recall, I've talked about our penetration of three units per million people internationally versus the 60 units per million we have in the US.

Further, in the top 10 emerging markets we currently have 1.5 units per million people.

This demonstrates that we are clearly on the ground floor of this huge growth opportunity.

Today, we have nearly 10,000 units in the emerging markets or roughly 55% of our total YRI in China units.

We're the largest restaurant company in emerging markets, and we are growing at a faster rate than our major QSR competition.

For the five-year period ending in 2009, we added about 4000 net new units in these markets, a 12% compound annual growth rate.

This compares to a 1% compound annual growth rate in the balance of our international operations.

As another benchmark, we currently have almost two times the number of emerging-market units as McDonald's, and we've added more net units than McDonald's at a three-to-one rate during the past five years.

And here's another important point.

Most of our competitors aren't even trying to open restaurants in many of these emerging markets.

Our experience is that it usually takes about 10 years to get to 100 units in a new country.

This is a point at which you can begin to scale a concept, as you have a proven consumer proposition, a more efficient supply chain and access to mass media such as television.

Overall, for emerging markets, Yum!

enjoys a combination of an existing lead in penetration, a higher growth rate and the knowledge of the lead times it would take others to have a meaningful presence in these markets.

This provides Yum!

with an opportunity to increase our competitive advantage that will likely last for a very long time.

In the upcoming calls and investor meetings we plan to provide more color commentary around our growth opportunities in emerging markets.

In summary, given our plans and our first quarter results, we believe Yum!

is well-positioned to once again deliver solid financial performance in 2010.

At the same time, we are equally excited about the foundation we are building in emerging markets to drive strong performance for many years to come.

Back to you, David.

All right, thank you very much, Rick, and let's open it up for Q&A.

(Operator instructions) Jeff Omohundro, Wells Fargo Securities.

Thanks, I just had two questions on the domestic business.

First, on the Pizza Hut value effort, I wonder if you could give a little more color on the impact on check and mix at the $10 promo.

And, given the response, do you think you will extend the LTO beyond the original plan?

How are you thinking about sustaining value there going forward?

As you know, we posted strong sales in the first quarter, 5%, and the promotion has been very successful.

And the reason is, it addressed our biggest problem, which is value.

I think what we've seen is that our comparable margins have held steady as we've had this sales lift and we've had strong flow-through, which has offset the lot of the price discounting that we've typically had with this promotion, obviously.

And the good news for us is that the brand metrics have really held solid so the brand is, in fact, improving in terms of its consumer perspective.

So what we are doing right now is we are looking and working very hard with our franchisees on ways to sustain our everyday value proposition.

And the franchisees are very committed, as they have seen the turnaround in the business and the power of making our brand more affordable and accessible to the vast majority of customers.

Just regarding your question on check, check was down close to about 10%, but transactions increased at a much faster rate than that.

My other question was on Taco Bell.

How are you assessing the consumer response to the Pacific Shrimp Taco?

I'm asking this because of the new protein efforts there, and should we expect to see more efforts along this line?

I think that the product response to the product or the consumer response to the product has been very good.

People like the product itself, and we actually had some products supply issues because the shrimp tacos basically flew off the shelf.

So I think it's the first time we ever had a fish product during Lent, which made a lot of sense.

So I think you will see that on a targeted in and out basis as we go forward.

David Tarantino, Robert W.

Baird.

Congratulations on a great start to the year.

My question is on China.

I was wondering if you would give more granularity on your thoughts on what's happening in the consumer environment.

You mentioned you are not ready to call a recovery in the Chinese consumer, yet your results were pretty strong in the quarter.

So my question is, what's giving you pause on calling for that recovery?

When we look at China, we look at a bunch of different measures from an economic standpoint.

One of the things I highlighted in my speech is one of the things we look at is consumer confidence.

And that's gone up the last three months, which is good but still below what it would have been probably about a year or a year and a half ago.

So we still have a ways for it to go.

You are starting to see exports rise as well.

Local governments are confident enough to start to increase wages again at a pretty high rate, which hurts us on the margin side but it's an indication that the people are starting to feel more bullish about the economy.

You still have the push towards the central and west that we've talked about before, and those economies are still doing a bit better than the coastal economies.

And we'll continue to move some of our development in that direction.

But I'd say it's better than it was, but not what it was, let's say, before things started going south.

Okay, very helpful, and one follow-up question on that.

Are you seeing anything since the close of your first quarter that would suggest that that type of low to mid single-digit comp would not be sustainable for the rest of the year?

Well, what we should have said is, for the second quarter, we expect similar types of numbers.

And we'd call something out if it's a significant difference.

We haven't seen a significant change since the first quarter.

Remember, last time we called out Pizza Hut.

So we don't call out a couple of points up or down.

David Palmer, UBS.

I wanted to ask a question about the US business.

It's just a real general question.

Obviously, the profit for that first quarter was down significantly.

You're not going to get any favors from food costs from this point forward as much.

There might have been a trend in sales that makes you feel better, but obviously the starting point in terms of [trend] (inaudible) on profit was not exactly a great one.

How do you feel?

What's the feeling about this US business profit wise for the year?

Obviously, you're not offering any guidance, but just any comments would be helpful.

Well, just to put some of the sales and profits and commodities and inflation in perspective, remember what I said, put in my speeches.

Our overlaps get significantly easier in the second half of the year.

So we are not necessarily assuming a great economic recovery for ourselves to get better.

We started lapping minus 7% in the second half of 2009.

So we are still running the business as if things are going to be pretty tight with the consumer.

And things are better than they were for us, obviously, in the third quarter and fourth quarter of last year.

But we still have a ways to go before we are going to say there's an economic recovery in the US.

On the commodities side, we had a little bit of commodity deflation in the first quarter.

Our current guess is it will be about flat for the full year.

So we don't see a huge difference there.

So we'll continue to try to do what we do in these types of times is, one, we have value initiatives; two, try to have some great product initiatives because obviously you need to have innovation as well.

And then we'll manage the costs pretty tight.

We're looking at both productivity initiatives in all of our brands.

And I think the teams has done a pretty good job of managing those costs.

In terms of the profits in the first quarter, our sales -- our Company, our overall sales were down 1%.

Our Company sales were down 2%, so that's probably why the profits, if you put that in perspective, is really why we were down 9%.

So given the minus 2% on Company, that's pretty much what we would have expected that to be, given that sales level.

And I think, in the end, as we look at how it all adds up, we are still comfortable with saying that we can grow our profits 5% in the US.

Thanks, congrats on the quarter.

Greg Badishkanian, Citigroup.

Good quarter, guys.

Can you talk a little bit about the pizza category in the US?

Who do you think you are taking share from?

And how sustainable do you think that's going to be over the next few quarters?

Well, I think what we've done is we've made ourselves much more competitive on the pricing front.

And we're seeing our gains coming -- usually, when we grow like we're growing right now, it comes from the overall category and the mom and pop's.

Do you think, over the next few quarters, this could be sustainable?

Or do you think you've seen some marketing and more exposure by consumers to get promotions, and maybe that fizzles out?

Or do you think that's going to be a sustainable --?

I think the category has always been enormous the competitive and always, especially on the pricing front.

And I think that the fact that we are being more competitive on the pricing front today helps, and the fact that the system is committed to that means that we should have more sustainability in our overall brand over time.

Jeff Farmer, Jefferies & Co.

You guys have been running without menu pricing in China for at least six months, according to my model.

What's the opportunity in coming quarters, especially if you expect to see some inflation in the back half of 2010?

We're obviously looking at that now.

We're trying to balance, again, as we said before, the Chinese consumer is still soft.

We had, obviously, a very favorable first quarter because, as we mentioned, labor was unusually low, costs were unusually low.

So we will have to look at that, but the good news is we've got some very positive profits going into that time frame.

But we're studying what we want to do now for the back half of the year, but we are not going to do anything at least for the next several months.

Jason West, Deutsche Bank.

I just wondered if you could update us on the KFC business in the US.

Last quarter, you talked about some of the franchisees were behind in making royalty payments.

You guys had a fairly sizable charge there.

Didn't see one of those this quarter.

If there is some improvement you are seeing there?

And then talk about the likelihood that you get a big transaction done or multiple transactions done on the refranchising side as well as the success of the new product you just launched.

On the bad debt side, we're going to keep our eye on that.

That actually did a little better in the first quarter, so our receivables are better.

And hopefully, we get into a higher seasonal time as the year gets over.

So keeping our eye on that, but probably a bit better than we were in the fourth quarter.

Regarding refranchising, just to put that into context again for people who may not be as familiar, we were on a three-year refranchising program that really started in the beginning of '08, and our goal was to go from over 20% of our US restaurants are company-owned to about 10%, which, as David said, about 5% at the KFC and Pizza Hut level.

In the first two years of that we finished Long John Silver's refranchising.

As David said, we're well on our way on Pizza Hut and we think we'll be close to finishing that within the original three-year time frame, which would have ended in 2010.

What we said in December is that we are behind on KFC.

We started late on KFC and therefore we think the total program will take a bit longer than we originally thought.

So KFC we really just started in earnest this quarter, in terms of floating deals.

So we'll have to see how -- we have a lot of work to do on that side.

We are still just hearing from potential buyers.

So we have a long way to go on that side, but we are going after it.

So we now think it's the right time to hit the market.

We think the brand is performing better than it was awhile back, and we're excited about some of the product initiatives that we have done in that we are going to do going forward.

Just from an overall business perspective, KFC continues to be our biggest challenge.

In the second quarter we'll likely be negative as we overlap last year's successful Kentucky Grilled Chicken launch.

However, we've got some really good programs including the launch of the Double Down sandwich, which we just introduced, and we have a pink bucket promotion coming up where we donate $0.50 of every bucket sold to fight breast cancer, which we feel very good about as well.

As we move forward we are really focused on more innovation around portable products and high end offerings, so we're going to leverage both our grilled and fried and boneless offerings as we go forward.

So for the full year we expect to see improvements in sales and definitely more profitability as we go forward.

The other thing we are very focused on and passionate about, and Roger Eaton is leading the charge on this at KFC, is that we are improving operations, because we see that definitely as our single biggest opportunity to drive sustainable same-store sales growth.

So there's a lot of work going on right now.

We put our best leaders that we have around the Company, we brought in a lot of talent at KFC.

We are totally passionate towards turning around the US business, and I'm really proud of the efforts that are going on.

But there's a lot of wood to chop, so to speak.

John Glass, Morgan Stanley.

On YRI, can you just walk through a couple of the key markets there and why you think your sales have remained so much soft; for example, the Australian market, maybe a little commentary on the UK as well, please?

I think YRI in Australia has had a real strong run, great track record of consistency.

Frankly, I think we've fallen a little bit behind on the pipeline and the innovation that we've typically had coming out of Australia.

So we expect that business to perform better, and it should.

The brand is very strong there, and we have tremendous opportunity to keep going as well.

In the UK we are very pleased with the progress that we've made with KFC.

KFC had an outstanding year last year in the United Kingdom, where we were up double digits in sales and profits.

And the businesses, KFC businesses, is beginning to build some momentum there.

Pizza Hut is our big challenge there.

We're in the midst of really trying to transform and turn that brand around and become a stronger affordable casual dining entry or competitor.

And I think we are really more in the early days of really making a substantial change there.

The team is on it, but we've got more work to do.

Just as it relates to the inflation that you are expecting commodities in China and wages, can you maybe quantify what kind of increases you would expect in the back half?

And even in this quarter, with a 4% comp increase, it looks like you delevered things like payroll and occupancy.

So what kind of comp do you need this year in China in order to offset those increases and those fixed costs?

Well, in terms of wages again, the background again is we had -- first of all, we had some good labor initiatives from the productivity side in China in 2009.

And then in the second half of 2009, in particular, the government really -- this is mostly local governments -- really didn't take up minimum wages.

They had very small increases in minimum wages.

So in the first half of this year we are benefiting from that.

And then, like I said, we are going to get hit with this probably harder than normal in the second half of the year.

So we said, as you know, we increased versus prior year in the first quarter 2.5 margin points.

And what we said for the full year is we would have a moderate increase.

So, in terms of sales, we don't have an exact sales number that we need but probably modest same-store sales growth in order to live with that kind of margin improvement for the full year.

Are we just going up at double-digit rates right now, or do you expect them to this year?

What's the order of magnitude of wage increase, do you think?

Well, I think what is happening is we benefited, as I said, in the first part of the year; we had lower than normal.

So normally, wages in China the last few -- if you go over about a four-year period, they are in the 8% to 10% level.

We actually had rates lower than that in the first half of this year and expect it to be higher than that in the balance of the year.

So it would probably average about 10% or so for the full year.

Sara Senatore, Sanford Bernstein.

Just a couple of disparate follow-ups here.

First, on Pizza Hut, I think you said that you thought that the share gains were coming from independents, maybe.

All of the publicly traded pizza guys, delivery guys, reported, actually, big improvement in comps.

So I guess at some point those share gains have to level off.

So I was just wondering, is there any other place that you can get the market growth from?

I think actually one of your competitors said that the market has been in decline for something like 10 years, and now is actually turning positive.

So I'm just trying to figure out, again, if there is the sort of sustainability.

So that's the one follow-up.

And then I have another on China.

I think one of the things you have in marketing, as you guys all know, there's nothing like the power of having the leading brand with the leading image.

And where you are value competitive, your odds of success are much better.

So this has always been a slug it out, very competitive share gain and category.

What we are trying to do is have a twofold strategy.

One is to be much more competitive in the pizza world, which we've done.

And the real challenge that we have now is to drive sustainable everyday value as we go in the future.

And the team is working very hard on how to stay competitive on the value front because we've seen the real power of it.

But the other thing we're trying to do is that we have tremendous opportunity to leverage our assets with the variety that we have invested in in the last couple of years.

For us that means establishing the pasta occasion and the wing occasion as separate and distinct occasions for Pizza Hut and marketing them primarily during the week so that we leverage the asset that we have.

So our strategy is to fight it out for share in the pizza category, leverage our leadership and, now, competitive value, and then leverage the asset that is definitely underutilized at Pizza Hut through the variety that we've created, the pasta and the wings and by really going after the earlier week occasion.

Okay, thanks.

And then, just on China, I just want an update on the new unit volumes versus existing, insofar as there is, obviously, 4% comps, 14% unit growth, and your total system-wide sales growth was less than the sum of that.

So are we still looking at a $200,000 difference in new unit volumes.

And can you talk about what the ramp is generally for units as they come online?

Just apples to apples, is a new unit lower volume than what it may be in year two or three?

Yes.

Generally, we have been at this trend for a few years now, which is our average unit volumes are about $1.4 million, and new units come in probably at about $1 million, $1.1 million.

So we are at about a $300,000 gap versus a new unit.

And that trend has been going on for a while.

Part of that is we go into smaller cities where we have a little bit more infills as we are developing into existing cities, and that's the reason why that there are lower sales levels.

We've said before, as you get to the smaller cities, the good news is, even with those lower sales our margins are similar because our cost structures are lower there.

In terms of ramp up, it's hard because we have so many new units that are coming in on top of each other.

But our sales rates are generally a bit higher in these smaller cities as we open.

So they will tend to grow at a higher rate in the first, let's say, four or five years than the general cities would.

Jeffrey Bernstein, Barclays Capital.

A couple of questions as well, one just on the US businesses.

We haven't talked much about Taco Bell.

I think you said you were somewhat disappointed with the down 2% comp.

Just wondering whether you could talk a little bit more about, I think you said this was a new trend of people skewing more towards the why pay more and perhaps less drink incidence.

Just wondering whether you could talk about that's specific to Taco Bell and whether -- what the impact has been from the competitive discounting jumping into Taco Bell's more discounted push.

Just trying to size up the Taco Bell business, and then I had a follow-up question.

First of all, we will always be disappointed with any kind of negative same-store sales growth.

So clearly we were down 2% in the first quarter.

As you know, the overall industry trends have been negative since June of '09, and we do have the strongest value position in the category.

What we saw in the first quarter was that our transactions were positive but we did have a lower average guest check -- less drinks and combo meals.

And most of our media spend was on the value, the $0.89 Beefy Five-Layer Burrito.

So we did have -- the Why Pay More usage increased to about 20% of our mix versus the 15% of the mix.

So this is what we were able to, obviously, maintain perhaps -- we haven't seen the research yet -- even fortified the value position that we -- if we know is going to be really essential as we go forward.

And we were able to do it in a competitive category where you are basically -- you point out the issue -- more and more people are really at the low end.

What we really are pleased about is that we had positive transactions, so more people are coming to Taco Bell this year than last year, and so we can build off of that strength.

Our biggest challenge is to get same-store sales growing again at Taco Bell.

We're obviously happy that transactions picked up, but it's much easier to build your sales off of positive transactions.

So we believe, as we look at our programs and our initiatives, that our value and our innovation is strong enough for us to get modest same-store sales growth for the balance of the year.

And as we pointed out at the analyst meeting that we had in New York, we are also extremely enthusiastic about the results we are getting from our more longer-term initiatives -- breakfast, home meal replacement, beverages.

These big sales layers, we have a lot of big ideas and tests that we are feeling better and better about as we go forward.

So we're very optimistic about the future of this brand.

We think we can get modest same-store sales growth the balance of the year.

But it's slug it out.

It's definitely a slug-it-out category right now.

What we're most excited about is just the long-term prospects of Taco Bell, where we begin to add some of these sales layers that we are talking about that we think can actually help us become a net new unit developer with Taco Bell.

So the brand is moving along, competing well in a very tough category with all kinds of upside.

And just a separate question as it relates to China, the positive 4% comp.

I know last quarter you were hesitant to really call much in the way of trends in China just because of the whole new year shift.

And with that now behind us, I think you said the new year shift was pretty strong.

Are you able to size up how much of that 4% came from new years and otherwise if that's the underlying trend?

Or you really can't even really take a stab at it until we get another couple of months?

It's really hard to, and that's why we said before, and I still believe that, we'll have a better handle as we get through this quarter than Chinese new year.

We had a very strong holiday, so that was a good sign.

But we haven't seen it -- we just need a longer period of time before we can judge beyond that.

John Ivankoe, JP Morgan.

I wanted to revisit YRI and the sales performance over the last couple of quarters.

We don't have a lot of data points, but you look at results at a Domino's, at McDonald's, even at a Starbucks, for example, and their international results are much better from a same-store sales perspective, even if they are developing units in certain markets.

So can you just go back to YRI and talk about -- I think you mentioned getting back on the new product pipeline in Australia, but if there's anything that's really going to change from a management perspective in terms of new core competencies like product development, advertising, operations, maybe even remodels?

If there's something that you think really needs to be redone in that marketplace is the first part.

Secondly, looking at those company store margins in YRI, they continue to be under pressure.

Last year it was evidently because commodity prices were contracted at the wrong time, but we are not really seeing relief in margins overall there.

So if you can just comment on, focus on Company store margins in the YRI division as well.

There's no question that YRI is off to a slow start with comps down 2%, and we've got work to do to regain our sales.

So you point out the issue, and definitely we are on the case.

We're focusing on value, primarily, in developed markets, given the tough environment.

What we're doing is we're taking a lot of the know-how that we have on permanent value menus from the success of -- like, markets like in South Africa, which is we have a streetwise menu and we are expanding that successfully into the UK, where it now has like 14% of the mix and a significant amount of incremental sales.

We're also revisiting our core signature items with new insights on products that are very unique in the marketplace, our Twister and our Zinger sandwiches, for example.

And we've also put together an initiative where we are launching regional successes from the past into new markets like the rap star sandwich, fillers and hot rods.

These are promotions that have done well in other markets that we are moving into new markets.

So we're trying to roll out and expand the proven winners into more geographies.

We also are continuing to roll out new incremental sales layers.

So Krushers, which is our line of frozen beverages, is now in 2000 units and we are shooting to have it in 4000 units by the end of the year.

So we expect that to give us a bit of a lift.

And we're hopeful that we will see a better half, a better second half in 2010.

Our first half lap was plus 4% in sales, and the second half was minus 1%.

So we're hopeful that with the initiatives we've got going we'll be able to see better performance in YRI.

So we're definitely on the case.

I think the team, our management, is working on the right things.

And we're going to make progress.

Regarding your question on the margins, John, that's pretty much driven by where we had sales weakness and strength.

To your point, it's really not driven by commodities.

Commodities, we haven't had the shifts in YRI that we've had in the US or China over the last few years.

So as we said before, they're relatively flat.

So a couple of our businesses like Pizza Hut UK -- as David said in his speech and comments -- have been underperforming, and that hurt our overall YRI margins.

And pizza in the UK is a higher transaction businesses when the economy is a little soft.

Our experience is they usually suffer a little bit more.

So the margins have pretty much followed the sales in this case.

So Australia is an equity business.

As David said, it isn't performing as well as normal.

And you said that in the release.

So that has also hurt us on the margin side.

So Australia and Pizza Hut UK are two of the countries that brought the margin down in the first quarter.

In terms of that value menu, how significant will that be across YRI in 2010?

What's the timing of some of that in the value menu?

It's hard to quantify, because we've been doing value for a while.

So quite a few countries already have sort of a value menu.

So what they're trying to do is to bring those learnings to other markets.

And it's done sequentially, so it's not like we have a launch of value July 1.

A lot of countries have already had it.

We're introducing it into more countries as we speak.

So there's not an event that we could really quantify easily.

Joe Buckley, Banc of America/Merrill Lynch.

In China, is there any natural advantage to the new year falling in February as opposed to January, or is it immaterial which month it falls in?

It doesn't really matter that much.

It's just more a function of, we have lapping in terms of outside of China YRI because sometimes it falls in the quarter, out of the quarter.

But we haven't really seen anything that dramatic in shifts between January and February.

Okay, and the plus 4% in mainland China -- were transactions up more than that?

Was check actually down, or would check be flattish and transactions up around 4%?

I don't have the exact numbers, but similar.

Transactions would have been similar to sales.

Okay.

And last week, there was some story I was reading about some Internet coupon deal that went awry in China.

Is that anything to be concerned about, or is that a minor PR bump in the road?

We made a couponing error and caused some concern with some customers.

We apologized for doing that.

It's a short-term issue.

Two questions on health care, Rick.

Any sense of the cost for Yum!?

And then, any pushback from franchisees in terms of buying units with the prospect of higher health care costs out in the not-so-distant future?

Joe, this year we anticipate a small impact of about $6 million for the loss of tax deduction for retiree medical benefits.

The major impact of this legislation will hit in 2014, and with our anticipated ownership change we're going to 5% ownership of Pizza Hut and KFC by 2014.

We think it's going to cost them about $20 million to $30 million, based on the existing work force structure that we anticipate.

So as you know, there's lots of legislative details to be ironed out in the next couple of years.

The real challenge is that this is going to be about $10,000 to $15,000 per store cost to our franchisees beginning in 2014.

And we're going to work with them to mitigate the cost.

So we've got plenty of time, I think, to deal with the issue.

But it certainly is an issue, and I think all of this is well understood by any franchisee who would be purchasing stores.

Keith Siegner, Credit Suisse.

Thanks; I want to ask a question about Taco Bell.

So we've walked through the top-line initiatives and early in the call you talked about how some of the domestic margins impact came from the deleverage at Taco Bell.

I wanted to ask if you could give a little bit more detail on the status, an opportunity behind the four-wall cost save initiative at Taco Bell that Greg Creed laid out at the December analyst day.

So any details on the status and opportunity there would be appreciated.

They've actively implemented all those things, so you are seeing that -- you saw that -- part of the result of that last year and you're seeing the continuing benefit now.

Okay, and then one other question.

The charge for the KFC units that are looking to be refranchised -- was this for all the units, like all 600 that you hoped to refranchise?

Was this just a portion?

And if just a portion, roughly how many was this charge in relation to?

How many units?

We've just said, it's a significant portion, so it's the lion's share of what we think we're going to be doing.

Mitch Speiser, Buckingham Research.

Just another question in China.

Just trying to get a sense, with comps up 4% in the first quarter, that was versus -- and up [2] -- and you are saying similar trends, yet the comparison is a whole lot easier.

I believe it was down 4% in the second quarter last year.

Even going back two years, I think the comparisons were similar.

So can you maybe just drill down a little bit deeper as to why you think the trends would not accelerate?

It sounds like you're being conservative, but is there anything that happened in the first quarter on the positive side that maybe doesn't flow through into the second quarter?

We've tried to look at this, like you have, different ways -- one year, two years, three years, actually, is sometimes the best way to look at it.

So I wouldn't overstate the prior year.

Try and just remember, last year was sort of an unusual year for China in terms of how people reacted to the economy, more violently than usual.

I think, as we look at this year, we just sort of totally told you what we believe is, we expect moderate growth off of those numbers that you saw in the second quarter last year.

Fair enough, and separate question.

In the segment data, corporate expenses, I believe, came in at around $30 million in the first quarter.

It was versus $46 million last year, so that definitely added a couple cents to earnings.

On the corporate expense side, is this $30 million per quarter run rate -- should we expect that going forward, or was it unusually low in the first quarter and it will re-normalize?

Yes; it was unusually low.

We had an unusually large upside in the first quarter.

What we said in December for the full year in the US is -- [I'm talking] US as well as the Yum!

piece of it.

On the US side we saw about a $6 million reduction in G&A.

What we said at the beginning of the year is we expect that the impact from refranchising to be in the $20 million range, and we thought that we'd be able to offset that money through G&A savings.

Right?

So the $6 million in the US and the $13 million in unallocated -- we're pretty much at that point now.

We'll probably get a little bit more upside the rest of the year, but not nearly as large as it was in the first quarter.

Steve West, Stifel Nicolaus.

It's [Matt] (inaudible) on for Steve this morning.

Just a question on Pizza Hut.

I guess the thought going forward on the next round of promotions -- is the $10 price point something that's important to keep, whether you limit the toppings or just change the messaging there and keep that $10 price point?

Or, do you feel the variability of getting whatever you want on a pizza is more important, and you might raise the price there?

Maybe just thoughts on that, and the potential to really bundle the pasta and the wings and the pizza together.

It seems like most of the messaging out there is one or the other.

And I know you've talked about generating separate occasions for each of those, but maybe just your thoughts on the bundling as well?

Thanks.

I think the most important thing is relative value.

Obviously, the $10 pizza any way you want it has been a strong relative value, and we are working on ways to keep that alive in this very competitive category.

So the last thing I'd do is tell everybody what we're going to be doing.

Okay?

But I think that, obviously, relative value is the real key here.

We're more into creating separate occasions that necessarily bundling.

If bundling happens with pasta and chicken, fine, but we think the bigger idea is to try to create separate occasions.

So I hope that's helpful.

All right, thank you.

Let me wrap things up briefly with some closing comments here.

We continue to execute against our global growth opportunities, both in China as well as Yum!

Restaurants International, with our leading industry new unit expansion.

Our focus is global, which is particularly strong in emerging markets like China and India.

KFC is a leading Western brand in many emerging markets and the fastest growing Western brand, and we are very pleased to be so well positioned in the fastest growing economies of the world with expanding middle-class populations, as Rick pointed out earlier.

In the United States we are making progress competing in a tough macro environment.

We are encouraged by recent sales trends at each of our brands but know that we have plenty of opportunity to drive value and innovation as we improve operations.

We are continuing to make solid progress against our goal of reducing US company ownership to 10% or less, targeting ownership of 5% at both Pizza Hut and KFC.

In closing, 2010 is off to a good start.

We had a good quarter, and we expect to deliver our target of at least 10% EPS this year.

So thank you all for participating in the call.

Appreciate the good questions.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.