百勝餐飲集團 (YUM) 2010 Q2 法說會逐字稿

Good morning.

My name is Jasper.

And I will be your conference operator.

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

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

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

(Operator Instructions).

Thank you.

I would now like to turn the call over to Mr.

Tim Jerzyk.

You may begin.

Thanks Jasper.

Good morning, everyone, and thanks for joining us today on our call.

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

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

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

I would like to remind new call includes forward-looking statements.

Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from these statements.

All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC.

In addition, please refer to the investor section of the Yum!

Brands website to find disclosures and reconciliations of any non-GAAP financial measures that may be used on today's call.

Finally, we would like you to be aware of an upcoming Yum!

investor event where will you have a great opportunity to meet the leadership team for one of our businesses.

September 21st we will host our Yum!

China investor conference in Shanghai, space is limited so please notify us if you are interested in attending as soon as possible.

Also, on Tuesday, October 5th, third quarter earnings will be released and a conference call will be held the following morning of October 6th.

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

Following remarks from both we will take your questions.

Now I will turn the call over to David Novak.

Thank you, Tim and good morning everyone.

I'm pleased to report we are raising our full-year 2010 EPS growth forecast at 12% based on our strong second quarter and first-half performance.

Our second quarter EPS growth of 17% before special items was fueled by profit growth in each of our three divisions.

We were particularly pleased with our business in China which reported robust profit growth of 33% driven by same-store sales growth, margin improvement, and continued unit development.

In the US, we are also pleased to see significant improvement in the operating profit despite flat same-store sales.

Our primary focus is to drive same-store sales growth balance of the year given the challenging consumer environment.

At Yum Restaurants International we increased system sales 4% prior to foreign currency translation benefit.

We expect stronger sales and profit growth for the balance of the year at YRI.

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

First, I'm obviously very is proud of our China team's performance.

Same-store sales grew by 4%, and units expanded 12%.

Our China division generated operating profit growth of 33%.

Through the first half of this year our China division's profit growth has been 35%.

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

We've opened 155 new units in our first two quarters and expect to open about 475 this year.

Our China new unit returns continue to be the best in our business.

00 AM and breakfast now makes up 10% of transactions.

Next is delivery, which is now available in 126 cities and nearly 1300 units.

Last, our 24-hour operations initiative is generated incremental sales and is in now about 1,000 restaurants.

Pizza Hut casual dining continues to be the leading western casual dining concept in China with 469 units in 122 cities.

We expect to open 63 Pizza Hut casual dining restaurants this year, which is up from 55 last year.

You may recall that beginning last year we slowed the growth of this concept substantially while we repositioned our menu.

With the success we've had, we have begun to increase development in tier one to three cities.

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

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

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

We also continue to invest behind the development of our emerging brands.

Pizza Hut home service in the home delivery category now has over 100 units in 11 cities.

East Donning, our Chinese fast-food brand, continues to progress as we drive for scalable economics.

Additionally, we own 27% of Little Sheep, the leading brand in the hot pot category which is the largest casual dining concept in China.

In summary, we're very pleased with the progress we're making executing our China strategy to build leading brands in every significant restaurant category.

Next, Yum Restaurants International, where our strategy is to drive aggressive expansion and build strong brands everywhere.

Similar to our China business, new unit development is a key driver for growth.

Our Yum Restaurants International growth strategy differs from China in that nearly 90% of our 284 new units so far this year that we've developed have been developed by our strong network of franchisees.

In fact, over 85% of the nearly 14,000 traditional restaurants in this division are franchise units which generate a steady growing stream of franchise royalties.

We expect to add about 900 new units for the full year.

Our second quarter system sales grew 4% excluding foreign currency translation.

While same-store sales were up 1%, overall we drove 7% operating profit growth excluding foreign currency translation for the quarter.

Based on the success we've had in China, we are aggressively going after sales layers at YRI.

In particular, KFC, our largest concept in Yum Restaurants International, is making major progress on driving value.

Value menus are in place in all our key markets and will be expanding further this year.

Our Crushers line of frozen beverages continues to expand and is now available in other 2100 stores and over 35 countries.

Our KFC breakfast initiative, which we call KFC AM, also continues to grow.

Pizza Hut continues to make progress elevating its brand offering and strengthening its positioning 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're encouraged by the progress we're making with our expanded menu including a wider variety of appetizers, beverages, entrees, and desserts.

Yum!

restaurant international's new growth markets, France, India, and Russia, delivered 13% system sales growth prior to foreign currency translation this quarter.

For the first time, our KFC France business used national television in May, and as you would expect, saw strong upward shift in sales.

Scaled and enabled television advertising is the result of us now having 100 restaurants in France.

On July 1st the Company also completed the exercise of our option with our Russian partner, and we now have full management control of the KFC brand in Russia in the commonwealth of independent states.

This market includes more than 150 cobranded KFC/Rosticks across Russia and the CIS, of which we now own approximately 50, with the remainder owned by our franchisees.

We're excited due to its large population and its appetite for chicken.

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

We now have over 70 KFC and 160 Pizza Hut in India.

Taco Bell International also continues to expand.

We on the part opinioned our first Taco Bell in the United Kingdom on June 28th and our first in Korea last week.

In fact, we've opened Taco Bells in seven new countries over the past two years.

Early results are promising, and we're working very hard to make Taco Bell a global brand.

Overall, Yum Restaurants International growth and development is on track.

Importantly, we have a leading position in substantial runway for growth in emerging markets.

I'd like to take a moment to thank our growth oriented franchise partners for the investment that they continue to make and for partnering with us to build a global business we can all be proud of.

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

Our US business achieved solid operating profit growth of 10% with substantial improvement in restaurant margin while posting flat same-store sales.

We are happy with the improvement in the business and are pleased with the strategies we are executing across each brand.

We look for sales growth to improve modestly at Taco Bell in the second half and stay strong at Pizza Hut.

At KFC, we remain confident in our long-term strategy but expect sales to be soft for the balance of the year.

Taco Bell, our largest and most profitable brand in the US, and in fact the second most profitable brand in our category in the US, continued its trend of growing transactions and grew same-store sales 1% for the quarter.

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 value.

We also continue to make progress testing breakfast, home meal replacement options, and a new beverage platform.

Taco Bell is performing well in this challenging market, and we've never been more confident than we are today about our future prospects for this great brand.

Pizza Hut led the way with 8% same-store sales growth for the quarter and our $10 any pizza promotion continues to be a huge consumer hit.

We continue to leverage this promotion as well as discounted day of the week specials such as Tuscany Tuesdays for our pasta line and wing Wednesdays.

People ask us about the sustainability of our $10 any promotion, and while one thing I certainly know is, what's not sustainable, and that's maintaining the high menu prices we had in our restaurants previously.

Pizza Hut is very focused on working with our franchisees to maintain everyday value.

We're also very focused on leveraging our asset like we're doing with the Tuscany Tuesdays, where we introduce pasta, now we're marketing it on Tuesdays and doing the same thing with wings on Wednesday.

We've talked about leveraging our assets in the past.

That strategy is definitely being executed and being done very well by the Pizza Hut team.

Pizza Hut's performance is strong and I want to assure you that we're working very hard to sustain it.

Now let me put KFC into perspective.

As I said earlier, we expect seems to be soft for the balance of the year.

Our focus remains on the following key areas; Improving operations, value, balanced options, featuring our grilled product, portable product innovations like the double down, and asset upgrades.

As you would expect, each of these major initiatives will take time to implement.

There is no quick fix.

We are, however, making progress.

Recently, KFC had had the single largest year-over-year improvement of any major QSR brand in the American Customer Satisfaction Index.

We take this as a positive sign that our efforts to launch Kentucky Grilled Chicken to compliment our world-class -- our world-famous fried chicken and simultaneously improve our operations are beginning to pay off.

In spite of this progress, sales have been underperforming, and we expect continued weak sales in the third quarter, however.

That said, we are in the midst of a transformation to truly make KFC a more relevant viewpoint and better operated brand and make no mistake, we have a great team that is providing the customer focused leadership required to do just that.

However, from a pure financial perspective, given our tremendous global growth and the success that we've had of a Taco Bell in the United States, KFC represents less than 10% of the US division's profits and less than 3% of the Company's overall profits.

We expect 2010 profit at KFC to be higher than last year and the execution of our refranchising strategy sets the brand up to make more money going forward with less capital investment.

Overall our US performance has improved, particularly well operating profit growth in the second quarter.

We are encouraged that same-store sales are now positive at Taco Bell, pleased with the continued success at Pizza Hut, and confident in the long-term strategy at KFC.

So let me wrap this up.

Quite simply, we've had a great first half of the year with strong operating profit growth.

We are pleased with the profit growth in each of our business units, specifically our strong performance in China.

We are confident in delivering our raised target of 12% EPS growth.

Now let me hand it over to our Chief Financial Officer, Rick Carucci.

Thank you David and good morning everyone.

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

Our second quarter results, our outlook for the second half of 2010, and Yum!

's unique position in emerging markets.

As we outlined on the last call, our second quarter results were similar to the first quarter.

Worldwide system sales grew by 4% and operating profit increased 21% prior to foreign currency translation benefits and special items.

EPS before special items grew by 17%.

We have now produced two solid quarters thanks to impressive performance from our China business and the benefit of $37 million of global commodity deflation.

Based on this first half performance, we raised our full year EPS growth target and are well on our way to delivering 12% growth.

Yum had solid profit balance in the quarter, despite having only 1% same-store sales growth at YRI and flat same-store sales in the US, we're able to generate profit growth in these segments.

When you add it all up, China grew operating profits by 33%.

YRI by 7% before for ex, and US by 10%.

US margins benefited from improved margin performance at KFC, refranchising, other cost favorability, and modest commodity deflation.

Overall, we continue to employ tight cost management, for the second quarter our G&A declined by $2 million in the US, and by $6 million at Yum!

corporate.

On the flip side our EPS was negatively impact by overlapping last year's very low tax rate in the quarter.

Our reported EPS declined by 6% due to the lap of a significant one-time gain in the second quarter 2009.

We noted in our release last night that we had add $60 million noncash gain in 2009 related to increasing our ownership in the KFC Shanghai joint venture.

Overall, with the strength of our global portfolio we achieved really solid operating performance in a fairly tough climate.

As we look ahead to the balance of 2010, we believe we will need to rely more and more on improving sales to drive profit growth.

Let's try to put the balance of the year in perspective by business segment.

First in China.

During the first half of the year we benefited from an improvement in the Chinese consumer where consumer confidence has now been positive year-over-year as a last six months.

At the same time, we saw substantial benefit of about $30 million from commodity deflation in the first half of the year.

We do not expect this highly favorable cost environment to continue.

We now expect very high labor inflation the second half of the year.

In addition, instead of the benefits of deflation, we expect significant commodity inflation in the fourth quarter.

Therefore, we continue to expect restaurant margins to increase only modestly for the full year.

That means while we expect very strong first -- full-year margins, we'll give back some of the first half gains during the balance of the year.

We also now expect that there will be some favorability from currency in the balance of 2010 as a result of the Chinese government's decision to loosen the peg of the wand to the US dollar.

This year our development is back end loaded but we feel good about delivering on our development goal of 475 units.

We expect China to continue to be a hey-growth and high-return market.

We continue to like our position in this highly important market of the 21st century.

While our first half operating profit at YRI was 4%, excluding foreign currency translation, we are excited about the opportunities in the second half of the year.

Markets around the world continue to launch Street Wise, our KFC branded value menu, which we expect will benefit transactions in the balance of the year.

We also plan to continue the launch of our Crushers beverage line.

We will continue to test and build other sales layers as David mentioned.

Please remember that our same-store sales comparisons will get easier as the third and fourth quarter of last year were down -- were flat and down 2% respectively.

On a reported basis, we expect the benefits of foreign currency to reverse as we anticipate head winds from currency translation in the fourth quarter.

In the US, we are still facing sustained unemployment and a concerned US consumer.

Again, the good news is we are lapping minus 6% same-store sales in the third quarter and even weaker minus 8% in the fourth quarter.

We believe that our focus on value across all brands will drive modest same-store sales growth in the second half of the year.

As I mentioned earlier, our margins benefited from commodity deflation and other cost favorability in the first half.

While we do not expect some of this up side to continue we will remain focused on cost management to help deliver profit growth in the second half.

Our US refranchising initiative remains on track.

We have made significant progress against refranchising the past couple of years.

Importantly, we have marketed substantially all remaining stores to be refranchised at KFC and Pizza Hut, and we are actively pursuing this pipeline.

We are not in a hurry but we do remain focused on getting the stores in the hands of the best operators.

While it is difficult to forecast the timing of refranchising with precision, we still expect to complete refranchising during 2011.

Overall, we are very confident that Yum!

is well positioned to achieve our revised target of 12% earnings per share growth.

On our last call, I shared with you our unique strength in emerging markets.

We outlined that we are currently the largest and fastest growing restaurant player in this arena.

Today I would like to give you more insight into the profit significance of this opportunity for Yum!

.

I will also briefly highlight a few emerging markets.

To use a common reference point, we are following the World Bank's guidelines in defining emerging markets which 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.

Our growing presence in emerging market is adding to our bottom line.

Back in 2006 about 30% of our overall operating profit came from emerging markets.

But in three short years it's grown to about 45% of our profit mix.

By 2015, we expect about 60% of Yum's operating profits to be generated by emerging markets.

Their equates to 15% compounded annual growth for these markets.

People often ask me what is our next China.

I don't know if we have another China out there, but in partnership with our franchisees we're investing is in a host of emerging markets that we expect to drive growth for many years to come.

The two leaders in emerging markets are Yum!

and McDonald's.

Yum!

is in about 70 emerging market countries while McDonald's is in about 60.

Obviously we'd love to invest in countries that have large populations and strong GDP growth.

Today we're going to highlight a few of these markets; Vietnam, Bangladesh, and Nigeria.

These are three countries where even McDonald's doesn't have a presence today.

Vietnam is the second fastest growing Asian economy behind only China.

The country's 86 million people are young with 60% of the population under the age of 27.

We opened our first KFC at the end of 1997, and we are now the most trusted QSR brand in the country with almost 80 KFCs.

Pizza Hut has about 10 stores.

We expect this country to have about 150 stores by 2015.

Bangladesh is another country with a young population that we have recently begun to develop.

About 60% of the almost 160 million people are under the age of 25.

Right now we have 11 restaurants with no other western restaurant brands in sight.

We hope to have 50 restaurants by 2015 in this country.

In Nigeria, the largest country in Africa with over 150 million people, our franchisee just opened the first two KFCs this year.

We are excited about Nigeria and really the rest of the African continent that is home to over one billion people.

These three franchise markets are examples of the huge opportunity ahead of Yum!

.

Together Vietnam, Bangladesh, and Nigeria are the home of almost 400 million people.

We are the market leaders, and we have only 100 restaurants.

This represents less than 0.3 restaurants per million people, compared to the international average of three, or the US level of 60 restaurants per million people.

So clearly we have a huge runway for growth.

In the coming calls and investor meetings we plan to provide more and more information around our position in emerging markets and the tremendous growth opportunity that that's marks represent.

So in summary, we are very comfortable with where we stand financially.

We have two quarters under our belts and very significant operating profit growth.

We are confident that we will again deliver our target of at least 10% EPS growth, and we are pleased that we raised our 2010 guidance to 12% growth.

At the same time, we are focused on building the foundation for future growth through sales layers and development in emerging markets.

Our goal is to build a business that will drive strong performance for our shareholders for many years to come.

All right, Rick, thank you very much, and we look forward to taking your questions.

We're ready to take questions, Jasper.

(Operator Instructions).

And your first question comes from the line of Jeff Omohundro.

Thanks.

Just two.

First, on the 12% revised growth target, what sort of FX outlook is embedded in that overall and broken down by China and YRI?

Then my second question is, on Pizza Hut and the positioning regarding value, how do you see transitioning from the $10 Pizza Hut promo, or is this do you think more of longer term repositioning towards greater delivery of value to consumers?

Thanks.

Thanks for the questions, Jeff.

I will go first.

This is Rick on the ForEx question.

On our balance of the year forecast, we're assuming some upside in China from ForEx in about the $10 million range.

We expect about $5 million negative in YRI for the balance of the year.

When you had a that up we figure about $5 million positive in the balance of the year.

I will let David handle the Pizza Hut value question.

Jeff, as you know we've had a dramatic turnaround in transactions and same-store sales growth since we launched the $10 any way you want it large pizzas, same-store sales growth up 8% in the second quarter so it's been a great success for us because what we have basically done by doing this is we address the single biggest problem that we've had in, frankly, our history.

We've always been perceived to be the most expensive pizza so now we've made our products, our pizzas very affordable and the consumer response has been overwhelmingly positive, as you would expect.

The good news for us is our comparable margins have held steady as we had the sales lift and we've had good strong flow-through to offset this kind of discounting.

And our brand metrics are obviously improving, certainly on the value side.

So as we go forward, we think when we look at the overall category, we think every day value is a fact of life.

And that we're going to have to work very hard to make sure that we make everyday value a staple of Pizza Hut, and we will have some premium priced pizzas, primarily those pizzas that we provide category breakthrough innovation around, but we're really working hard at attacking our cost structure and working with our franchisees to make sure that we continue a very strong everyday value proposition as we go forward.

So I think you will continue to see great value coming from Pizza Hut, which is a terrific opportunity for us.

And one thing we've learned is being premium priced in this kind of environment that we're in right now is certainly not the strategy anyone can pursue, and we think that we understand what we have to do in the pizza category, and Scott Bergren and the Pizza Hut team are working hand in hand with our franchisees to come up with an endearing way to provide value.

Thanks Jeff.

Next question please, Jasper.

Next question comes from the line of David Palmer.

Congrats on the first half.

Thank you.

Yum!

delivered, I think it was 20% profit growth for the first half of the year, and China drove 70% of that growth.

Meanwhile the US was flat.

Thinking about the second half, as we think about and try to model the second half, it does seem ridiculous, I guess to expect 20% profit growth all the time.

However, your guidance implies something closer to 10% profit growth in the second half.

Could you help us think about why the profit growth would slow so significantly or why it might slow significantly?

And I have a quick follow-up.

Well, let me explain some of the dynamics, David, in the second half of the year.

First, was a follow up with a question that Jeff raised.

We talked about ForEx.

ForEx in the first half is the year we had a $28 million upside.

We said in the second half of the year that will slow to about a $5 million net upside.

The cost dynamics in China are interesting when you look at it on a first half/second half of the year basis.

And that's probably the biggest shift that we'll see, is in the first half of the year, we had about $30 million of commodity deflation, in the second half we expect about $15 million of inflation, most of that in the fourth quarter.

The second turnaround is labor.

We expected labor inflation coming into the year.

However, the labor inflation, some of the rates that have occurred were higher than our initial expectations.

So in the first half of the year we had about $12 million year-over-year increase in labor, and in the back half we expect that to be about $32 million.

So that's an extra $20 million of labor in the second half versus the first half.

So if you add that up there's a $45 million swing on commodities, $20 million swing on labor.

So that's what's sort of driving less profit growth in China in the second half than the first half.

The last thing, which is just the hard thing to know, and as I said in my speech, we're more reliant on sales in the second half of the year, and this is just obviously an environment where sales are still fairly hard to come by.

So that's sort of our expectations when we look at the balance of the year.

I guess the follow-up would be on the pricing power in China, and how that would have a sort of lags and leads impact to your business.

You mentioned food and labor inflation in China, but, for instance, if labor costs go up 8%, you should be able to offset that with one point of price given that labor is a relatively low percent of your sales.

Meanwhile that labor inflation, theoretically is your consumers making more money.

So you just had some pricing roll off in the second quarter here in China.

I'm thinking about your pricing, how that will come into play.

Maybe you're thinking pricing might come back late in the year, not enough to help you, but set you up well for calendar 2011.

How should we think about that?

That's exactly the way we are thinking about it, David.

Obviously we know that we need to cover these inflation increases at some point with pricing.

We still expect -- just to back up, we expect for the full year to have very healthy margins in China.

Growth on last year, which were also very healthy margins.

Overall we like where we stand.

Regarding the ebbs and flows to your point, we had an unbelievable position in the second quarter where we had sort of relatively flow labor cost, negative commodities, obviously solid same-store sales growth.

In the later part of this year we are having the inflation we talked about.

Clearly we believe we have the pricing ability in China.

We have arguably the strongest consumer brand in China.

We have to take in pricing before and if everybody's got labor inflation I expect there to be pricing throughout the market, right.

So I think the timing of that, to your point, is likely to be sort of late this year that won't benefit this year but should cover us in 2011.

Thanks very much.

Thanks, David.

Next question please, Jasper.

And your next question comes from the line of John Glass.

Thanks very much.

Could you talk a little bit about, on sales trends during the quarter, I think coming out of the first quarter there was some excitement about the 4% comp because it was against a relatively difficult comparison relative to the rest of this year.

This quarter, if you just use that two-year math, it wasn't quite as robust.

Maybe two year comparisons just don't work any more.

So how do you think about ex pricing the back half of the year and same-store sales in China?

Has there been any material acceleration/deceleration patterns or is the 4% just a good number to plug in as we think about the back half of the year?

If you want to talk about the last six weeks since the quarter ended in China that would always be helpful as well.

We don't really have anything to say about trends within the quarter or since the quarter.

Short answer to your question, 4% is as good as anything out there but that's your judgment to make.

It's really hard.

We've looked at this a bunch of different ways internally, John, in terms of last year, two years, in this case you almost have to go back three years, because if you remember, the earthquake hit in the middle of 2008.

So you had very strong growth in the first half of that year.

So what we've said at the end of the first quarter was, I actually feel better now than I did at the end of the first quarter.

First quarter, we had the same number, 4% growth.

At that point we actually said that's probably as good a number to use as any in the second quarter.

The first quarter was really just based on two months, because of the way our calendar is set up in China, and some of that was a holiday period so it's hard to get a read on it.

At this point we have three more months of information.

We have three more months where the consumer confidence in China is higher than a year ago.

And it's not off the charts yet, but it's slowly coming back.

I think that the Chinese consumer is improving, sort of slowly but steadily.

It isn't all the way back yet, but it's better than last year.

So your profit forecast would assume a 4% comp in China in the back half of the year?

I'm not going to be that precise.

In that neighborhood.

On the US margins, how much of the improvement at KFC and maybe just overall in the US margins was temporary or helped by something you did in the cutting labor, reducing labor, whatever, and how much of this is sustainable?

In other words, the profit improvement we're seeing at KFC is that something we ought to read through to the back half of the year?

Yes, there's obviously a lot of moving factors when you look at margins.

There's sort of two pieces that I think are harder to duplicate.

One, we talked about, which were commodities.

We've had modest commodity deflation in the first half of the year.

It was $5 million in the first quarter, a little less than that in the second quarter.

We also benefited in the second quarter by a small reduction in discounting when you add it all up across the businesses.

That, I don't know whether that will repeat as well.

But on the flip side we have gone hard after costs improvements, and I think some of those will continue in the back half.

When we put it all together, we're assuming slightly positive margin improvement for the full year in the US.

Thank you.

Thanks, John.

Next question, please, Jasper.

And your next question comes from the line of Joe Buckley.

Thank you.

Good morning.

Couple more questions on China.

Talk about wage inflation, not your specific wage inflation, but wage inflation across the country, and does the China team expect that to lead to better sales?

Yes, again, just to review for people, we did expect labor inflation in the back half, there's always been sort of consistent labor inflation.

The piece that we were surprised at the level of is last year labor inflation was maybe a little less than typical, and we thought this year would be back to normal.

What really happened is that this year sort of made up for last year being a light year.

So you add higher than normal labor inflation.

You would think that that's going to help consumers hard to tell the timing of that.

In the long run obviously if more people have money in their pockets they are going to spend some of that but it's really hard for us to quantify.

Obviously the growing middle class in China is a benefit to us from a sales perspective but also from a development perspective as more trade zones come in.

So it's not necessarily a bad overall development, it just sort of impacts our profit from quarter to quarter.

Okay.

And are you positioning the brand in any way to take advantage of what presumably would be higher income levels for your consumers?

I will let David talk a little bit about that, but I think we're already well positioned to that.

KFC has always had a very strong image in China.

So I think we've always positioned ourselves, even though it's -- quick service restaurant is somewhat aspirational, Pizza Hut even more so.

So as the consumers have more money I think we're actually positioned pretty well.

I don't know if David wants to--?

I think people are going to have more money to spend throughout the day.

And I think what we're doing now is with breakfast with 24-hour service, with home delivery, basically we're positioning ourselves to make our brand, which is clearly one of the strongest consumer brands, if not the strongest consumer brand in China, available to customers any time they want it.

So I think the team is doing a great job of positioning ourselves to take advantage of what's going to inevitably be growing buying power.

We've just seen -- I know you've followed us for a long time.

The number of middle-class consumers, the estimates just keep going up by the millions every year, and we don't see that getting any smaller, then the average per capita income is getting higher and higher of that group.

So this is all good news for us.

We're very well positioned at KFC.

Also Pizza Hut casual dining, which remember now, we have [454] casual dining units, and we're doing the same thing there.

We've made our product more affordable, we're leveraging assets with tea time.

We actually during the tea time period have a higher market share of beverage consumption than Starbucks would have in China.

So I think all of these -- all of the things that we're doing are positioning us to take advantage of the growing buying power in this country.

And separately, one of the big markets, there's no question, there isn't anybody that doesn't think that Pizza Hut home delivery isn't going to be a viable brand or category in China.

And we're there.

We also see the Chinese fast-food category emerging, and we continue to make progress for East Dawning.

So our strategy is to have the leading brands in every significant category.

What we're trying to do is build every one of our brands into power brands so we can compete effectively.

As the buying power of the consumer increases, which it will inevitably do, we will be able to take advantage of it.

One thing is kind of interesting is I think you all were involved in the fourth quarter last year, even the second quarter of all last year.

There's big concern as to whether we would ever be able to grow our same-store sales again.

So we're pretty pleased with the fact that we've actually grown our same-store sales this year 4%.

We're feeling very good that we've had two straight quarters of 15% same-store sales growth.

System sales growth, excuse me.

And all of that, Joe, has been transaction driven with no pricing, even though we obviously have, with our brand, pricing power.

And as you know, our profit target for China is 15%.

Our profits year to date are up 35%.

So we're pretty happy that we're ahead of schedule, and we're really happy that each one of our brands are stronger today than they were yesterday, from a consumer perspective.

So I think when you step back and look at where we're at with China, it would be pretty difficult to imagine a better scenario.

We couldn't be happier.

And we just keep growing talent like you can't believe there, and that's one of those intangibles that you can't see.

But our talent level is better, our operations continue to be best in class.

We're leveraging the asset throughout the day.

We're not even -- we're in 1,000 stores in home delivery.

1,000 stores in 24-hour service.

We're just getting started.

We expect to have at least 14,000 KFC's some day.

So it's just a matter of time.

I always say we'll have ebbs and flows in China, ups and downs, all that kind of good stuff, but we're really glad we're there.

We're really glad we're there with the team that we have, we are really glad that we have the brands that we have, and this is a long-term proposition.

It's really great to get the short-term growth along the way.

Can I ask just one more, just on YRI, the second half, the confidence that the second half will be better?

Can you talk about the Pizza Hut versus KFC performance at YRI and why the confidence in the second half?

Well, again, we mentioned, YRI has been a pretty steady performer over the year.

We are going to continue to have the development growth that we always have.

You saw that the second quarter results were a little bit better than the first quarter.

We start lapping easier numbers as we get into the back half of the year.

So we're lapping negative same-store sales in the back half of 2009, so we feel good about our ability to do that.

On your Pizza Hut question, Pizza Hut has been several points behind KFC on a year-to-date basis, which isn't surprising given the environment.

It's more casual dining, and therefore more premium price.

So that difference is there.

I'm not sure if that will change much in the balance of the year.

We've also struggled with Pizza Hut results in the UK year to date, and that's been some of the reason for the margin decline that you saw in the second quarter.

We're working to make that better, and hopefully that will be better in the second half of the year, so we expect margins to get a little bit better in the second half as well.

Thank you.

Thanks, Joe.

Next question, please, Jasper.

And your next question comes from the line of Rachel Rothman.

This is Jake Bartlett in for Rachel.

I had a question about the franchising.

You have essentially affirmed your 500 store target in the US.

I think you have about 71 done to date.

Can you talk about the process where you are in the process?

Maybe what obstacles you are seeing, whether it's financing on the part of the franchisees, also maybe give us an idea of where you are think you are going to fall mostly in the 4Q versus 3Q and just kind of your level of confidence in hitting that target.

Thanks.

Again, we've made quite a bit of progress over the years on this, and I think we've refranchised about 1300 restaurants since we put this in place.

One of the things we did was we waited really until the first quarter of this year, the end of the first quarter before we really marketed all of the KFCs.

So the good news, at least from the refranchising team's perspective, is pretty much everything that we plan to refranchise is now on the market.

So as I said in my speech, we're really actively pursuing that, so you've got a lot of discussions on various size transactions.

So it's really hard to predict when they will fall.

So it's really hard, even an annual estimate on this is tough, which is why I said in both our release and the speech that we plan to finish sometime in 2011.

But I do feel still confident in that target, and I can't really discuss the specific areas, but I do expect that you'll see clearly more numbers in the second half of the year than in the first half.

Okay.

But the 500 store target is more in 2011 than 2010?

500 was our estimate for 2010.

We really didn't comment further on that target today because as I said before, it's really hard to predict the timing.

I think it will be -- I doubt it will be exactly 500, because they're lumpy, some of these transactions that we're working on.

But what we said, we originally wanted to finish at the end of 2010.

What we said now is we'll finish sometime during 2011.

Okay.

Just a quick follow-up.

On the proceeds per unit, looks like they spiked some.

Was there anything abnormal in this quarter and the ones that you did in Q2?

Just in the second quarter we happened to have a few Taco Bells.

Most of our refranchising is Pizza Hut and KFC but we had some refranchising of Taco Bells.

Sort of the typical level that we've been doing each year but they fell in the second quarter, and those command a higher price.

Thank you.

Thanks.

Next question, please, Jasper.

And your next question comes from the line of Jeffrey Bernstein.

Great, thank you.

Couple questions on the US business.

One, just in terms of you mentioned obviously greater focus on value continues.

Just wondering whether you can give us an update both at Taco Bell and Pizza Hut in terms of whether it be the $2 meal or the $10 promotion, in terms of what type of mix you are getting off of that.

Is it more just advertising that's bringing people in but not necessarily as many orders as you would expect?

I'm just wondering if you can size up the mix, perhaps the average check, the profit contribution, whatever metric is on each of those two promotions that seems to be working for you, then I had a follow-up question.

David really talked about the strategy on value.

Pizza Hut, most of our sales are on the $10 pizza.

So it's the predominant part of our business.

On the $2 menu, that's been in about 5% of our mix so far.

Obviously one of the things we're keeping our eye on, Jeffrey is how that mix -- where that mix comes from and whether that changes over time.

So far it's pretty similar to the test.

Some of it has come from the why pay more menu.

A fair chunk of it has come from there, but we'll keep an eye on that as we go forward.

Okay.

And that's helped drive transactions up at Taco Bell.

Right.

In terms of on the margin side, from the US, it looks like you mentioned kind of commodity changes in most of the year, but we did see some pretty large swings in both labor and occupancy in terms of driving what was pressure on the margin in the first half to meaningful expansion of margin.

Actually, first quarter, versus meaningful expansion in the second quarter.

Just wondering whether those type of swings in labor and occupancy are sustainable.

It seemed like the comps were relatively similar first and second quarter but there was pretty drastic swing on the margin side.

Just wondering about the labor and occupancy component.

We've benefited from refranchising.

That has helped the margins.

That should be sustainable.

And then we probably got a little higher swing than normal in some of our insurance costs.

That's sustainable, but the hit in the second quarter was higher than normal - - the benefit in the second quarter was higher than normal.

Jeff, that benefits both labor and occupancy, because you've got Workers' Comp, insurance, labor, then you've got casualty and all the other general insurance in the other occupancy line.

Is there a way to size up of the 150 -- there's even more than that in terms of the swing versus the first quarter, but just how much insurance relates to that?

No, I mean, basically we generally, on the comment in the release, we put it in order of magnitude.

Okay.

So that's generally our direction on that kind of thing.

Lastly, in terms of the cash usage, it looks like obviously the shift to share repurchase was on in the second quarter with $115 million, and debt paydown remains fairly modest.

Just wondering, any updated thoughts in terms of balance of holding cash versus how you think about repurchase versus for the dividend boost or debt paydown whether there's any kind of swing, or we should assume continued share repurchase like we saw in this quarter?

First of all, the cash went up a little bit really just because of the timing of repatriating some money.

So driven largely by China.

You will see swings from quarter to quarter on that piece of it.

So don't read too much into that.

The repurchase side, we're probably no change versus what we've said previously.

We are going to continue to repurchase stock.

The debt piece of it, we have a large payout, but that's really in 2011.

That's a $600 million payout.

We don't believe we'll touch any of that or have the opportunity to profitably pay that off in 2010.

So I don't expect anything significant on that front.

Great, thank you.

Thanks Jeff.

Next question, Jasper.

Your next question comes from the line of Jonathan [Comp].

Hi thanks, its Jonathan Comp calling in for David.

Just a quick follow-up question on trends in YRI.

Specifically I'm wondering if you can give a little bit more color on why you didn't see an even bigger sequential improvement during the second quarter given that comparisons were much easier and you also did benefit from the Chinese New Year shift.

Secondly, follow up to that, if there's anything unique about the comparisons in YRI during the back half that really give you confidence that trends will improve.

We've pretty much covered most of the points so far but let me sort of put them together.

One is we've sort of said together we are lapping easier numbers in the second half of the year.

So we did have some improvement.

Even if you factor out the Chinese New Year we had had some improvement from the second quarter to the first quarter.

It's been sticky, though, for us in some of our developed markets.

So we've seen, if you look at our splits, you've seen the franchise businesses doing well.

A lot of those are those emerging markets we talked about.

We haven't performed as well in some of our developed countries.

So we've been a little slow in Australia, which you saw in the release, as well as Pizza Hut UK.

I don't see necessarily those changing a lot but should get a little bit better again, as we get into the easier comparisons.

Thanks for the question, Jasper, next question, please.

And your next question comes from the line of Larry Miller.

Yes, thanks.

Most of my questions have been asked, but I did want to follow up on that refranchising question.

Have you guys talked about at what ownership level you would be at, at the end, in 2011 for the KFC and Pizza Hut business then I had one question -- or one other question about returns in China.

Thanks.

What we said is overall for the US about 10%, and that we'd approach close to 5% at KFC and Pizza Hut.

That's what I thought.

Then can you just give us a sense?

Because I think you reaccelerated growth in Pizza Hut in China.

That's about a year ago.

Now you have had a pretty good sense of gauging returns.

You said clearly things are better.

Can you give us a sense how those returns are stacking up just in absolute terms, then relative to the KFC, and then not a lot of mention of East Dawning.

I know it's something you've been work on quite a long period of time.

How far off are you, you think, from figuring out the unit economics of that division?

To make sure I understand the question, are you talking about new unit returns for Pizza Hut?

Casual dining in China.

Just to back up, what Larry is referring to for the rest of the folks is that we sort of said that we last year slowed down development at Pizza Hut.

What's driving that is we were seeing two instances where we weren't getting the types of returns that we look to get.

One was what we call in-fill return in tier one cities.

So not a new trade area, but trying to put one closer to an existing unit.

The second was in some tier three cities, the second units that we're putting in tier three cities weren't performing as well.

The good news is that we're still being pretty cautious on some of the tier one cities.

The tier three are actually, the results we've had are looking better, so we feel more confident going into more and more tier three cities.

We've slowly started to ramp back up the development on tier one.

The returns in Pizza Hut are not significantly different than the KFC type of returns.

So we're talking cash paybacks in less than three years.

Great.

East Dawning, where you guys stand in terms of the economics?

I'll talk a little bit about the economics, let David talk about the concept.

We try -- we're very hopeful about East Dawning because it's a big idea.

The consumer side keeps getting better each year.

The cooking platform we get more and more confidence.

Having said that, we're a long way away from having unit economics that will allow us to expand rapidly.

So don't expect large increases in the near future.

At the same time, I think we feel good about the progress that we've made.

We've gone to a central kitchen, which is helping our unit economics.

We've improved our everyday value proposition.

We've got a beverage platform that we feel really good about that will help us leverage the asset even more throughout the day.

And we continue to be confident that we're going to -- that we will have a concept.

We just -- we don't want to get the cart ahead of the horse here.

We've got enough great things to really tout very definitively when we talk about KFC and Pizza Hut.

Thanks very much, appreciate that.

Thanks Larry.

Next question please, Jasper.

Next question comes from the line of John Ivankoe.

Hi, thank you.

Question on KFC.

I'm just going to ask you to step back a little bit and talk about kind of the success of grilled chicken now that it's been in the system for a little bit over a year and what you would have done differently for that product to more sustain sales and if there's any lessons that you have learned there across all of your US brands.

I'm going to ask that in the context of your -- the financial health of your franchisees and their willingness to participate in other initiatives that may actually cost them money up-front, whether it be operational or other physical assets, investments just to keep that brand healthy so it can participate on the up swing in the next cycle.

Right.

I think Kentucky Grilled Chicken, if you look at all the brand measures, has done nothing but improve our position in the marketplaces.

I mentioned to you earlier, the American customer satisfaction index we had an eight-point swing, which is the highest of any major brand.

So clearly the Kentucky Grilled Chicken has made KFC in the US much more relevant than it would have otherwise been.

I think as you look at the current performance, we have about 10% to 15% mix of Kentucky Grilled Chicken.

I was just reading the AKFC quarterly, which is the franchise magazine that the franchisees publish and they tout it as a success and feel good about.

We've got a base that we can build from.

So I think that we're very pleased that we launched it.

I think some challenges that we have, we're working on better consistency just in piece size, we've got a project to help us work on that with our suppliers.

I think that's one thing that we think will help us get even more sustainability over the long term, just from a product perspective.

But this product, John, as you know, and I'm sure you've read, has had rave reviews from food critics.

It's an outstanding product.

There's no question about it.

It's five-star taste.

It's been named product of the year.

People in the industry who develop, have recognized our people who develop the product.

I think it was a huge win.

When I look at KFC's prospects here in the US I think we're working on the things that will really matter.

Improving our chicken on the bone with a better balance between the fried and the grilled, introducing portable products.

We now have an outstanding fillet, grilled fillet, and fried fillet.

It's allowing us to do products like the double down and also move into the sandwich arena.

So that's been a big move forward for the brand.

One of our big challenges is that our pricing approaches casual dining pricing because we're a high end business.

And when you have pricing that gets into that casual dining arena, or close to it, there aren't too many concepts that are growing robustly today.

So our value proposition is a major challenge for us, as we go forward.

I think as it relates to investment, that's one of the challenges that we do have with the KFC system.

It is a tough time right now.

Future investments will -- we need to get the business healthier, but we have an operating platform and equipment package that gives us more variety than we've ever had from an opportunity from an innovation perspective.

If you recall, KFC in the US is the only place in the world where we've invested in back of the house capability for the franchisees, because we felt it was so important for us to get into grilled chicken.

We helped fund and finance the ovens.

I think this shows how committed we are to growing the business here in the US because this is the origin of the brand.

And so I think the team here we have is outstanding, working hard in a difficult situation, and we think we'll have steady -- slow but steady progress as we go forward.

The great news is that KFC, outside the United States, is something for the US franchise system to aspire towards being.

And we've got a team here very dedicated to making that happen, and we're going to be relentless in terms of making that happen, because we think we can be much more proud of the KFC brand here in the US, even though we're very proud of it, very proud of the origin, we think we can be even better.

And our job is to push the franchise system into doing the things that need to be done.

Improving ops, improving assets, improving our value proposition.

Well, I know there was a lot of concern and it showed up in your P&L in the fourth quarter 2009 in franchise expense but do you think the overall financial health of the KFC franchise system in the US is stable?

Are you concerned that there might be significant store closures in the future if things don't improve from a comp perspective?

In terms of the franchise stability, obviously we've gone through a couple of lean years on sales so we're always taking a closer look on that.

Things have actually improved over the last few quarters so we are in better shape from a franchise health perspective in terms of that piece of it.

So I would say that we are stable.

In terms of closures over time, to David's point, we are going to have to keep reinvesting in assets, to the extent that people are unable to do that, that could lead to closures.

We're not as focused on the store count in the US the way we are international.

We want to have a quality system.

If we can have 4500 fantastic, great looking KFCs, I'd rather have 4,500 great looking KFCs than 5,000 with 500 being drive-by assets.

So we are totally prepared to do whatever it takes to get this system to look like a leader, be a leader and get where we need to go, and it will take time.

But, make no mistake about it, we are totally committed to doing that.

It's literally, what, about 3% of our total profits.

My God, this is upside for us.

And that's what we're really going after, working with our good franchise partners to make that happen.

That's very helpful.

Thank you.

Thanks John.

Next question, please, Jasper.

Your next question comes from the line of Tom Forte with Telsey Advisory Group.

Two questions.

So the first was on the Taco Bell tested breakfast.

I want to know if you feel any differently given that since you first launched the test you have seen Subway come into the space with kind of a value message, and the rollout of the dollar menu at McDonald's for breakfast.

Then second, just for my own curiosity, any comment on, for Kentucky Fried Chicken, the either margin impact or the mix from the double downs?

The Taco Bell breakfast program, we are continuing to be very optimistic.

Tucson was our original test market.

McDonald's threw everything in the kitchen sink at us in terms of price discounting.

We're already at break even in Tucson.

We're also in three other markets that we're working towards that same goal.

I just met with the franchisees two weeks ago, a meeting with Greg Creed.

We all know the single biggest thing we can do at Taco Bell is develop another $100,000 to $300,000 sales layer because we've got the best unit economics outside of McDonalds that I think are in the industry.

Second most profitable brand.

In our mind breakfast is not a question of whether, it's a question of when.

We feel like we're making more and more progress, and we know how we can get even better.

The other thing, we're very excited about, we have a beverage platform at Taco Bell that will be going into a complete market and launching.

Right now when you upgrade our assets with our new bold assets you get a 7% to 8% increase in sales.

We're hoping that will take it to the 15% to 16% increase, which will help fund more reinvestment into Taco Bell.

So the breakfast and beverage platforms we think are really very positive developments for us, and the only thing I can say is we're further along now than we were when I talked to you about it last time.

We continue to make progress.

But we're committed to these sales layers because this is what's going to really invigorate the brand.

We think we should have 8,000 Taco Bells in the US.

Why not?

Burger King does.

You can't tell me that Burger King has a more charismatic brand, more loved brand than Taco Bell.

Taco Bell is a brand that everybody talks about.

So we've got a great franchise, but we need $100,000 to $300,000 more in sales so these big platforms are what we're really committed to getting after.

The other thing, even with our existing equipment we can get into home meal replacement.

So we're bundling up our home meal replacement ideas, taco meals, Tuesday tacos, things like that that we're working on that also give us a chance to get some lower hanging fruit, easier to do significant sales growth as we go forward.

So I'm very optimistic, I think you can tell, about the Taco Bell brand.

Right now we've got transaction growth, slightly positive sales, but when I think of the future, it's really bright.

And, Tom, regarding your other question, the mix of double down is immaterial to our margins.

KFC margins will be determined more like sales commodities.

It was a talked about product, no doubt about that.

It is one big eat.

So if you haven't had it, give it a try.

Thank you.

Next question, Jasper.

And your next question comes from the line of Keith Siegner with Credit Suisse.

Just a question for Rick, I just wanted to follow up on the margin trends in the US by concept.

For example like Pizza Hut, since the launch of $10 any and some of those other things, are restaurant level margins, not op margins, but restaurant-level margins are they up year-over-year?

Taco Bell was in the mid 18's last year.

How is it trending?

Is it up year on year?

It has to be some portion of those two in order to get to the total, can't just be KFC.

If you could help me a little bit understand the margin trends at Pizza Hut and Taco Bell that would be great.

The Pizza Hut margins are down slightly.

Overall the business proposition works with the $10 pizza because it's grown transactions.

We're working very hard to work on the cost side to make that sustainable and affordable on a long-term basis.

Nothing really major to report on the mix that's going to be happening within the Taco Bell portfolio.

So really keep an eye on the sales.

Sales will probably be the biggest driver there.

The only thing that's unusual, KFC has benefited a little bit more because this year they've gotten a disproportionate amount of the commodity benefit so far.

We expect that probably to continue a little bit as well in the back half of the year.

Okay.

One really quick follow-up then.

Since all the books are out, basically, it sounds like, for all of the anticipated refranchising, while we may have some gains or losses on refranchising is it safe to assume that the impairments that you take when you put the units for sale have all been taken?

What happens is, the way the accounting works, you try to estimate what the selling price is and if that requires a write-down, you take that when it is launched.

There's a percentage of goodwill write-off that we also take.

That we don't take until the unit is sold.

So some of these units sell, you'll see some goodwill -- same with lease liability.

Thank you.

Thanks.

Next question, Jasper.

And your next question comes from the line of Linda (inaudible)--.

Hi, thanks for taking my question.

Just a little more detail on your new growth markets, if you could.

On India I'm wondering when you get to sufficient scale such that you can launch on TV, and how you see that market ramp.

Then in France, can you talk about any impact from the launch on national TV?

Yes, I think with India we have 70 KFCs.

We already do television in India, and it's -- we're just continuing to build the brand and expand.

We're making good progress at KFC.

The consumer response has been great.

With France we now have 100 restaurants in France, which has enabled television for the first time we launched TV and I think our sales were up about 15%, which is what we would typically expect in a new market like that.

Continental Europe is a significant opportunity for us, and we're really at the ground stage there.

Our unit economics are getting better and better because we have high volumes.

We're actually getting close now in Germany as well.

So we're making good progress there, and that's another significant opportunity for us, even though they're typically so-called more developed markets.

So is France or Continental Europe a bigger near term opportunity than India?

Or how would you characterize those opportunities?

We're full speed ahead on India.

We think India is going to be a tremendous opportunity for us, and if you ever get a chance to go down there and meet with our team there, just like China, we have 100% Indian team.

We have tremendous operations.

We've gone to school on the China model.

We're executing the China model in India with superior talent.

So we're very, very bullish on India.

Thank you.

Thank you.

Next question, please, Jasper.

And your next question comes from the line of Sara Senatore with Sanford Bernstein.

Hi, thank you.

I have a quick question on the US business.

SG&A, looks like you got some leverage there.

I just want to understand -- I'm sorry, just the overall SG&A, which is just to say, can you help me understand like what, if there's sort of a minimum amount of SG&A that you need no matter how franchised you are?

I know you took out some costs initially with -- in anticipation of being a more franchised model.

But is there something -- is there more you can take out if you go from 90% to 95% franchise in some of the US businesses, or as your YRI becomes a bigger piece of the business?

Just trying to think about what kind of minimum overhead you need regardless of whether or not -- of what the franchise mix is.

Then I had a follow-up on YRI, just looking at disaggregating the markets.

Is it fair -- you said emerging markets were better.

Is it fair if I look at the systemwide sales growth ex FX, do the comp trends, does the order of magnitude of comp trends match the order of magnitude of system wide sales or is there faster unit growth in some of these markets that might explain some of that?

I'll answer the first part -- the last part, Sara.

On the emerging markets, I think what you're trying to get at, we said 10% system sales growth for emerging markets, and about flat for the developed.

The unit growth end of the developed side is roughly longer term is about plus 1.

And on the emerging markets, it's -- I believe it's about 7.

Hopefully that gives you an idea.

I think that's what you were looking for.

Yes, exactly.

Then on the G&A, again, when we started the program, we looked at the G&A that would be reduced, and we sort of said it would be close to offsetting the loss we'd have in trading out from restaurant margin to royalties.

We've now said we'll do at least that well, maybe even a little better.

So we got a head start on that though.

We decided at the beginning of 2009 really to take a fairly significant G&A reduction.

So right now, with the reduction that occurs now is mostly, I'll call it store related type of G&A.

So area coaches and those types of moves.

But when you put it together, we're still confident that we could at least offset the amount of trade down you get between restaurant margin and royalty.

So that's why we sort of said we could make at least as much money at KFC on a long-term basis is we're still confident that math will work for us with the G&A reduction and the royalty will be at least as high as what we're making in restaurant margin today.

Thank you.

Thanks Sara.

Next question, Jasper.

And your next question comes from the line of Mitch Speiser with Buckingham Research.

Great thanks very much and just another question on YRI.

You did talk about the developed markets and Pizza Hut UK in particular that was soft.

Could you maybe go through two or three other developed markets and just give us a sense how the comp trends have been versus maybe the first quarter and fourth quarter?

Have things gotten a little bit better or a little bit worse?

And separately, on YRI, can you give us your general food cost outlook?

Should we see food costs up ticking for the YRI division in the back half as well?

Thank you.

Let me take the second part first.

We really don't expect anything material on the YRI said on commodities in the second half of the year.

We haven't seen a lot in the first half, too, so we look at that as pretty level in the first half, pretty level in the second half.

If you look at just the two biggest company-owned markets that are developed, Australia and the UK, and they were one point better in the second quarter than the first quarter.

So I wouldn't really call that a trend.

So things are still a little soft there.

We haven't had anything to really forecast on those for the balance of the year.

Do want to say, because we talked at the Pizza Hut UK business had been soft, but the KFC UK business, especially over the last several years, has performed really well, and they're performing I think pretty well in this environment.

So I think that team has done a heck of a job, not just this year, but in previous years.

If you look at the developed -- the developing markets, you see the trends there.

The thing that was sort of note worthy to me there was the Middle East number, where the macro is there, improved somewhat, but not nearly to the extent we grew there as well.

So again, I just want to give a shout-out to the team in the Middle East, that's also done a really good job in this environment.

Thanks, Mitch.

Next question, please, Jasper.

A follow-up question coming from the line of David Palmer with UBS.

You pretty much just answered my question which was the fact that it looked like Asia, Latin America, Middle East, improving recently, developed markets on a very shallow recovery from a sluggish start.

Is that really how you would sum up the consumer -- sort of the invisible hand of the consumer as you look at your numbers?

Yes, I think that's a pretty good summary.

The consumer in developed marks is still uncertain, a little uneasy, and therefore we're not expecting -- we're not planning for a remarkable recovery of the consumer there.

We're looking at that as hopefully a steady recovery off of what's still a low base.

On the developing markets, those seem to -- they always were pretty good, and they're starting to take maybe a bit more life.

Thanks.

Thanks, David.

There are no further questions at this time.

Okay, let me briefly wrap up our comments today and -- by saying that as a result of our strong year to date profit performance, we are raising our full-year EPS growth target to 12% excluding special items.

Remember we're going to be relying on sustained China sales performance and improved same-store sales growth at Taco Bell and YRI in the second half of the year to achieve our target.

We are especially pleased with our leading position in China where our strategy is to build leading brands in every significant restaurant category.

I hope we've shed the proper light on that today.

We continue to execute against our global growth opportunities, especially in the emerging markets.

There's no doubt that we're well positioned in the fastest growing economies of the world with rapidly expanding middle-class populations.

We are making progress in our US business and we're confident in delivering 12% EPS growth this year making 2010 our ninth consecutive year of delivering our annual target of at least 10%.

Thank you very much for being on the call.

Enjoyed taking your questions, and have a great week.

This concludes today's conference call.

You may now disconnect.