百勝餐飲集團 (YUM) 2011 Q1 法說會逐字稿

Good morning.

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

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

Brands first quarter 2011 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)

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

Tim Jerzyk, Senior Vice President of Investor Relations.

Please go ahead, sir.

Thanks, Tina.

Good morning, everyone, and thanks for joining us this morning.

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

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

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

We would like to remind you this conference 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 web site to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call.

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

investor events.

Wednesday July 13th, our second quarter earnings will be released, and we'll follow up with a call the next morning.

Wednesday, August 3rd, we'll host a YRI investor day in Dallas, Texas.

Thursday, September 8th, we'll host our China investor conference in Shanghai.

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

Following remarks from both, we'll take your questions.

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

Thank you, Tim, and good morning, everyone.

Let me first start by addressing the tragic events that continue to impact the people in Japan.

We're relieved that our people are safe and that none of our team members were among the thousands who lost their lives during the earthquake and the devastating tsunami that followed.

Our thoughts and our prayers are with our Japanese partners as their people recover from this tragedy, and a special thanks to our Japanese partners there who have just been working around the clock to make this -- make this the least of an issue as possible for our people, and they've done a great job.

Now, if you'll recall, in 2010, we said it was perhaps our best year ever as a Public Company.

As a result, we entered 2011 with solid momentum.

I'm pleased to announce that our two major growth engines, China and Yum!

Restaurants International continue to produce strong results in the first quarter.

In fact, China's results were simply outstanding.

These results, however, were dampened by the climb in US profits, driven primarily by negative publicity from false claims against the quality food we have at Taco Bell.

Otherwise, we would have had a double-digit EPS growth quarter excluding special items.

Now, on to our strategies.

Let me start with our China business, where our strategy is to build leading brands in every significant category.

Rick Carucci and I just met with the team in Shanghai, and believe me we are making it happen.

Operating profits grew 18%, prior to foreign currency translation benefit, as same-store sales jumped a remarkable 13%.

Combined with the 12% increase in units, system sales grew 24% for the quarter.

Even more impressive, same-store transactions increased 15%, which is our largest increase in transactions since 2004.

This exceptional increase in traffic gives us even more confidence that our category-leading brands are stronger than ever, and well position for sustained growth ahead.

Our KFC business just keeps getting stronger.

Same-store sales grew 14% in the quarter, and we continue to make good progress growing average unit volumes with 24-hour operations, delivery service, and we're building a solid breakfast business.

We added 78 units in the first quarter and now have over 3,300 KFCs in China, which is 2,000 more restaurants than our nearest competitor.

Our business continues to expand deep into China, striking a balance between KFC classics and menu offerings, unique to the Chinese taste, like congee for breakfast and rice-based entrees.

We had breakfast at KFC and the products are fantastic.

Continuous product innovation and operational excellence keeps the brand vibrant.

It's growing and extremely profitable.

Now, on to Pizza Hut.

Pizza Hut Casual Dining in China continues to be a huge success story.

We had another fantastic quarter, delivering 12% same-store sales growth.

This marks our fifth consecutive quarter of double-digit same-store sales growth at Pizza Hut Casual Dining.

Our pizza, and more positioning, backed by our strategy to refresh the menu every six months, as well as offering compelling value, is resonating with our consumers and driving results.

We have more than 530 restaurants in over 130 cities, and we added 13 new locations in the first quarter.

Clearly, Pizza Hut is well positioned for sustained growth ahead.

We also continue to make progress developing our emerging brands.

Pizza Hut home service now has 120 units in 11 cities, and East Dawning, our Chinese fast food brand, has 21 units in 4 cities.

Angela Loh, our East Dawning General Manager, and her team are working hard at improving unit economics with the goal of developing a successful national brand.

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

In summary, our China business continues to fire on all cylinders.

We've never been more confident in the strength and growth prospects of our business.

Hands off to Sam SU and his world-class team who are clearly delivering dynasty-like performance for each of our brands.

I don't know a lot of Chinese, but I do know the phrase [doragaishen], which means build more.

Next, Yum!

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

YRI produced solid results in the quarter, with system sales growth of 6% and operating profit growth of 8%, prior to the benefit of foreign currency translation.

Same-store sales increased 2%, and restaurant margin improved 1.4 percentage points.

New unit development, which like China, is a key driver of growth for this business, continued with 131 new units this quarter.

Over 90% of these units were opened by our strong network of Franchisees.

Overall, we continue to expect to open about 900 units at YRI for the full year.

We remain very focused on the development of emerging markets.

90 of our 131 new restaurants this quarter were opened in emerging markets, where YRI now has 6,400 restaurants across 67 countries, a level that is unmatched by our competitors.

I'm particularly pleased with our performance in the world's second largest emerging market, India, where we're investing capital as well as planning for significant Franchisee development.

Our business in India grew system sales over 40% in the first quarter, including 13% same-store sales growth.

The big news is our KFC business, where we now have 108 restaurants.

Remember, crossing the hundred-unit threshold is a significant milestone that enables accelerated growth.

The India team has gone to school on the China business and is following the same road map by developing day parts and tailoring the menu to local tastes.

For example, we have a delicious line of vegetarian products.

My favorite is the Zinger vegetarian sandwich, which is fantastic.

And, we're building a significant beverage layer with tremendous variety in both hot and cold drinks through our Crush Bar, which we're treating as a restaurant within a restaurant; basically a specialty store as a beverage center.

We also have world-class operations that bring it all together.

Overall, I'm absolutely delighted at how Indian consumers have taken to our brands, and extremely optimistic about our enormous future growth opportunity in this country.

Speaking of opportunities in emerging markets, I just spent two days in Jakarta, where KFC and Pizza Hut are Indonesia's leading brands.

With over 240 million people in the country, we like our position there.

Indonesia is the largest KFC developer in YRI, and we just opened our 400th KFC last week.

We have four times as many restaurants as our nearest competitor, and a commanding market share.

Our Pizza Hut brand now has 200 restaurants in the country.

It took nearly 20 years to reach our first 100, but only five years to build the next 100.

Another example of that magic in reaching 100 units in a country.

I was told by our franchise partner, Steve McCarthy, that the definition of pizza in Indonesia is Pizza Hut, followed by a comma and then pan pizza.

After spending a day with Stephen, and seeing some of the best restaurants in the world and the energetic teams they have there, I'll take his word for it.

Even with over 600 KFCs and Pizza Hut restaurants combined, we only have two restaurants per million people in Indonesia.

We're clearly on the ground floor of growth in this emerging market.

In addition to our growth opportunities with KFC and Pizza Hut, we believe Taco Bell will become Yum's third global brand.

We've entered 10 new countries over the past two years, and expect to enter four more this year.

Building a brand in a new country is not easy, but we're betting that Taco Bell will be a long-term growth driver.

In summary, YRI growth and development is on track and delivering solid results.

We're pleased with the progress we're making with same-store sales growth and restaurant margins.

Longer term, we continue to build our category-leading position in emerging markets and look for continued growth ahead.

In the United States, we had a challenging quarter, no doubt about it.

Same-store sales fell 1%, and our restaurant margins declined 1.6 percentage points.

Taco Bell, our most profitable US brand, began the year with strong momentum and grew same-store sales 4% in the first period.

Unexpectedly, as I mentioned earlier, our positive sales momentum was reversed when we were thrown a curveball with the false claim around our food quality.

This impact has lingered longer than we anticipated, given it was an imagined story versus reality.

What has happened is that research shows our heavy users are basically maintaining their frequency and remain very loyal to Taco Bell.

However, light users are staying on the sidelines for the time being and have reduced their purchase frequency.

As a result, our overall reach has narrowed slightly, but enough to impact sales trends significantly and take the fun out of the business.

The good news is that this is a meritless lawsuit, and it was withdrawn by the Alabama law firm after reviewing the facts.

The team will leverage this event, and is working on other solutions to recapture the sales momentum we had at the beginning of the year.

So, let me wrap this up.

All things considered, we had a solid quarter.

China is stronger than ever and continues to be a tremendous growth engine.

YRI performance was solid, and the US results are disappointing.

As we look forward, we are very excited about our position as a leader in emerging markets.

We also remain confident that 2011 will be the 10th consecutive year we achieve our annual target of at least 10% EPS growth.

Now, let me turn it over to Rick Carucci, our CFO, who will take you through the numbers.

Thank you, David, and good morning, everyone.

Today, I'm going to focus on two areas.

First, I'm going to give some context to our first quarter results, and then I'll discuss the outlook for the balance of 2011.

As David mentioned, our first quarter results were a tale of two cities.

Our strong international results offset negative performance in the US and helped us deliver EPS growth of 7%, excluding special items.

On the positive side, foreign currency translation for both YRI and China provided about a 1 to -- $12 million pre-tax benefit, or roughly a $0.02 EPS benefit.

On the other hand, our tax rate was 27.1%, compared to 25.7% last year.

This was about a 2% drag on our EPS growth.

Now, let's take you through each of the divisions.

China produced another outstanding quarter driven by new unit development and transaction growth.

This allowed us to grow profits 18% prior to foreign currency translation while taking modest pricing actions toward the end of January.

Our check during the quarter actually declined slightly, as we also offered compelling value for breakfast and snacking occasions at a time when Chinese consumers were sensitive to rising prices.

We ended the quarter with a healthy 25% restaurant margin.

This is a 1.5 point decrease from the record levels posted in the first quarter of 2010.

As expected, about 1 point of this decline was commodity and wage inflation, while the business tax had an impact of 0.5 point as well.

Overall, as CFO, I was quite satisfied with 25% first quarter margins in China.

Next, Yum!

Restaurants International posted a solid quarter.

We grew system sales by 6%, prior to foreign currency translation, and improved restaurant margins 1.4 percentage points.

Sales growth was led by significant strength in our emerging markets and YRI's less developed markets.

We had strong sales results in India, Africa, France, and Germany.

Margins benefited from continued strong performance from our KFC businesses in the UK, France, and Thailand.

Our Pizza Hut UK and KFC Australia businesses were a drag on first quarter restaurant margins and operating profits.

We are preparing the launch of a new menu and service proposition for the Pizza Hut UK dine-in business.

Based on test results, we are hopeful this will improve base business performance in the second half of the year.

We also plan to re-franchise about a hundred Pizza Hut units in the UK this year.

At KFC Australia, we are encouraged by the introduction of the streetwise value menu that took place in the back end of the first quarter.

Finally, the US division had a disappointing first quarter.

We saw a 13% profit decline and a 1% drop in same-store sales.

As David mentioned, clearly, the publicity from the lawsuit against Taco Bell had a negative impact on sales.

We were surprised by the magnitude and the sustained nature of the sales impact that this event had on our business.

The US first quarter results also reflected lower sales and a negative year-over-year re-franchising impact of Pizza Hut.

On the whole our US restaurant margins declined 1.6 percentage points versus prior year.

This was due to inflation, as well as an unfavorable mix driven by value initiatives.

Unfortunately, we do not expect the second in the US to get better.

In fact, we believe it will be the low point of the year for the US segment.

We have not yet been able to reverse the negative sales trends at Taco Bell.

If anything, sales have gotten a little bit weaker since the end of the quarter, and it is difficult to predict exactly when we will break this trend.

We are hopeful that the withdrawal of the lawsuit will be the first step towards sales recovery.

Now, let me talk some more about what we expect for the rest of the year.

Despite some tough sliding in the first half in the US, and some inflation headwinds, we expect 2011 to be another strong year for Yum!.

China will once again be Yum's leading profit driver for the full year.

I was just in China with David, and I agree that the China business is stronger than ever.

I was particularly pleased with the strong development performance.

Not only did we open 92 restaurants in the first 2 months of the year, but the profitability and returns of the new units that we have recently opened remain very strong.

It feels great when you get to see both quantity and quality in new unit development.

Despite our strong sales growth in China, we still face some profit challenges during the balance of the year.

The commodity and labor inflation we saw in the first quarter will continue.

We are now estimating commodity inflation of about 7% for the full year.

As a reminder, we had already increased our labor inflation estimate to the mid-teens during our comments last quarter.

We will also be overlapping the $16 million profit benefit for our participation in the 2010 World Expo in Shanghai.

This will have its strongest impact in the third quarter.

Fortunately, though, we have the benefit of strong sales growth, and as David outlined, our two leading brands are stronger than ever.

While managing inflation is a challenge, we do not believe it weakens our competitive advantage in any way.

Higher wages improve the purchasing power of the Chinese consumer and make our brands affordable to more people.

Also, as we demonstrated in the first quarter, our full day menu offering and our broad national penetration provide us with more options for managing inflation than our competitors.

When you put it all together, we expect 2011 to be a strong year of sales and profit growth.

At Yum!

Restaurants International we've gotten off to a solid start and we expect that to continue for the remainder of the year.

In terms of headwinds in that division, we expect Japan profits to be down $3 million to $6 million due to the impact of the tragic earthquake and tsunami.

In the third quarter at YRI, we incur the expense of our bi-annual franchisee convention.

Commodity inflation has less direct impact in this division due to the fact that 90% of the business is franchised.

However, the improving global economy, strong performance in emerging markets and new unit development should all combine to drive sales and profits for the remainder of the year.

As a reminder, at YRI we expect our new units to drive about half of our profit growth for the full year.

Finally, in the US, we expect our performance to recover after it bottoms out in the second quarter.

Given the value-conscious consumer in the US, high gas prices, and high food inflation, we know it's going to be a challenging year.

Clearly, the key to our improvement in the US relies heavily on our ability to turn around sales trends at Taco Bell.

We do have a favorable G&A comparison in the fourth quarter, due to higher than normal costs in 2010.

Overall, we remain very focused in managing costs in every area of our business.

Our re-franchising efforts in the US this year are largely focused around KFC.

Our goal remains to reduce KFC company ownership from the current 15% level to about 5%.

We only re-franchised nine units in the first quarter, and we expect to pick up the pace in the balance of the year.

While it's unlikely that we'll reach the 5% level by the end of 2011, we do expect to make meaningful progress toward that goal.

Please remember our biggest priority in re-franchising is to ensure that we find the best operator for our brand.

So, when we look at China, YRI and the US together, here are our quarterly profit expectations.

We expect a rough second quarter in the US We have some modest year-over-year overlap challenges in China and YRI in the third quarter, and we expect strong across-the-board growth in the fourth quarter.

We certainly face some profit challenges this year.

It looks like it will be a bumpy year, and a more back-end loaded profit year than I originally expected.

However, I have a lot of confidence in the Yum!

business model.

I feel better than ever in our China business and take comfort in knowing that the strongest brands fare the best during inflationary times.

YRI is on solid footing with an improving global economy and a powerful development engine.

The US is going to be a challenge, but I know that Taco Bell is a powerful, resilient brand, and that it will bounce back.

I feel very fortunate we have such a strong global portfolio.

Despite a few bumps in the road, I remain confident that we end the year in a stronger position than when we started.

I am also confident that Yum!

will deliver at least 10% EPS growth in 2011, excluding special items.

This will mark the 10th year in a row of achieving our target.

Back to you, David.

All right.

Great.

Thank you very much, Rick.

Why don't we open it up for Q&A.

(Operator Instructions)

Our first question will come from the line of Michael Kelter with Goldman Sachs.

Hi, guys.

I wanted to ask about the China same-store sales growth, which was phenomenal.

Just what you see as the drivers?

Whether, for example, you saw a difference in Tier One or Two cities versus Three to Six, whether -- it seems like you took some pricing, but yet because of promotions, check was down.

Does that mean you cracked the code on some sort of marketing campaign that could be sustainable and can drive sales?

Just some context around how you think you got there and what you think is sustainable.

I think the biggest thing that's going on now is that we obviously have a tremendous operating team in China, and operational excellence is the name of the game there, with 80% of our restaurant managers have at least a college education, and we're very focused on leveraging our asset, and I think the great news for China is that we're at the ground floor in three emerging segments out of the KFC asset.

And that is number one, breakfast.

We're still way under 10% in terms of mix of breakfast, yet, we have a tremendous value menu for breakfast, six R and B, fantastic products, and breakfast is a growth segment for us.

Number two is home delivery.

Most of our restaurants in China are not drive-through.

They're basically in-lines because of the dense locations.

But, home delivery, in effect, is the drive-through vehicle for those units, and is doing well.

Home and business delivery, being able to take our products to the customer is working for us.

Okay?

And -- excuse me here.

I must have my daughter calling me here.

I apologize.

And, I think the third thing that is driving our business performance is the expansion of 24-hour service, and, that -- so if you look at 24-hour service, home delivery and breakfast, these are three significant ways to leverage our asset that we're in the early days on, and we think that the growth that we will get from these segments will be sustainable.

The other thing that the team has done an excellent job of is really offering great value in our core business as well.

And, all of the brand measures that we have are moving in the right direction.

So, that's KFC.

You have anything to add on KFC, Rick?

I would just add that regarding your question around the tiered cities is that we had strong growth across the board.

It was especially strong in the smaller tiered cities, which out performed the Tier One and Tier Two cities, but we were pleased with the performance everywhere.

And to build on David's point about snacking and breakfast, I mentioned in my speech we felt we had some good value initiatives there, which we will continue throughout the rest of the year.

And then --

Go ahead.

Particularly on China, you also made a point to translate for us the phrase "build more." I guess, does that imply that maybe you might accelerate your expansion there?

Because, even with that phrase translated, you haven't necessarily done it in the last year or two?

Yes.

I guess 550 restaurants is not that much expansion.

I think we're pretty happy with our rate of development.

We're not making any announcement that we're going to accelerate any further than that.

But, we continue to build people capability.

The great thing is that our unit economics continue to be fantastic.

Not only KFC, but even more so now with Pizza Hut, because that brand has been dramatically turned around, and through the variety, additional variety that we've offered in the casual dining format and the everyday value proposition.

So, I think in total last year, we did 507 restaurants.

We're basically in that camp this year.

We have great unit economics.

We'll continue to grow as the opportunities present themselves.

Just too build on David's point, with the Pizza Hut brand, for those who recall, a couple of years ago we were struggling a little bit with our second units in Tier Three cities.

The good news is those are performing better.

In fact, our early Pizza Hut performance in Tier Four cities is also strong.

So, we do think we have a bigger opportunity to grow units at Pizza Hut than we have historically.

Thank you, very much.

You bet.

Thanks, Michael.

Next question, please, Tina.

Our next question will come from the line of David Palmer with UBS.

Thanks.

Obviously, China was very strong, and I wonder how we should be thinking about that business for this year?

Obviously, the traffic number was a little bit higher than the same-store sales, and I understand you did some value in the quarter.

Is there -- is this the kind of year that you're going to be -- you have a strategy that you've sort of discovered here in the first quarter that you're going to stick with?

Where you're pushing value, perhaps holding back on pricing; this is going to be something that resonates with the consumer in a world of inflation over there, and perhaps hold you in good stead for even future years, and you're willing to sacrifice some profitability to do that?

Or is this more of an extreme version of the P&L impact that we should expect in future quarters?

In other words, value may not be as much of a focus in future quarters, and perhaps we will expect moderating same-store sales and better profitability.

I think, David, the value proposition for KFC, Pizza Hut, and our brands is always going to be paramount, because what we want to do is make our brands as affordable and ubiquitous for all Chinese customers, as that economy continues to bring in more and more users to our brands and just more and more consumers to the country.

So, value is something that will be ongoing and something that we will always make a major priority.

I think the big thing that we have unlocked is the power of the asset that we have, through the development of breakfast, home delivery, and 24-hour service.

And, this is driving the vast majority of our growth that we have.

As I mentioned earlier, we're really on the ground floor of each of those segments.

So, I think the combination of the value plus the asset leverage puts us in a very good shape to continue to drive same store-sales and traffic over the long term.

Now, obviously, the kind of traffic growth we had this quarter is amazing.

So, we're not saying that's going to happen.

But, we definitely believe the China model, the China growth model as it relates to Yum!

is in great shape for years to come.

I would say versus our typical model year we have smaller same-store sales growth and less inflation.

This year we expect to have more inflation and more same-store sales growth than our typical model.

Our typical model is about the 4% to 6% rate of same-store sales.

I do expect this year to be more than that, but we need it because of the inflation.

And, if I could just make one comment about the whole Taco Bell situation, and that is that, the fact that you could have what seems to be, with inflation heating up, Taco Bell should have been crushing it this year.

I know your team was excited about the innovation pipeline they had in place.

I feel bad for your Franchisees who are independent business people, the suppliers, that this year is playing out the way that it is.

What sort of plan B are you guys implementing there, given the fact that the brand is in a different place?

Maybe you're not going be trying to do as much innovation trade-up as you might have been.

What adjustments are you making to the marketing at Taco Bell?

Thank you for your comments, David.

This has been an absolute outrage, frankly.

For now, what we're doing, we're focused on running great restaurants, serving great products, and just reassuring our customers about the quality integrity at Taco Bell.

Unfortunately, for the lawyers, they picked the wrong corporate pocket, okay?

And, I'm really proud of Greg Creed and the Taco Bell team for standing up to this ridiculous case.

Clearly, this was a case where we were sued first and asked later.

They made false statements about our products.

We provided them, and the court, with statements from our suppliers and our labs, and they dropped the case, which is extremely rare, and is proof-positive that, we are in the right here.

There were no charges, no money, no releases.

They just dropped the case.

So, we got -- the story is now getting out, and we think that is good news.

In terms of our marketing strategy, we're looking at a number of different ways to really lift the brand up from this unfortunate situation that was caused by the law firm.

And, we have a good calendar, a strong calendar.

What we're going to do is get back focused on executing that calendar and listening and responding the voice of the customer.

We're looking at all of our options right now, on how to deal with the situation.

The great news is, as you know, Taco Bell is a great QSR brand with no significant national competitor, and, we're going to get back to what we do best, and that's selling our food and giving our customers great service.

And, so we're optimistic that we will be able to get the business turned around, but we've got some work to do.

As I mentioned earlier, the heavy user is very loyal to us, and has basically stuck with us to a good extent, but, we have lost our light user base, and that's reduced our overall reach, and we've got to -- hopefully this dismissal of this suit is a first step of us beginning to get our entire franchise back where it ought to be.

Thanks, David.

Thanks, Dave.

Next question, please, Tina.

Our next question will come from the line of Jeff Omohundro with Wells Fargo.

Thanks.

Just another question on China.

As we think about the past many years in China, building scale, with a focus on the rapid unit growth and increasing asset utilization, I'm just wondering, in the context of a much higher inflation environment, what your views might be about opportunities perhaps to initiate programs to improve cost management, perhaps in areas such as labor scheduling, food costs, the classic areas that perhaps could be new opportunities for the brand in China.

Well, obviously, we're always looking at ways to improve our cost structure.

As David said, they're a very good operating team, always focused on how they can get more and more efficient.

As a reminder, too, it's one place where we do own our distribution system.

So, it does allow us to, manage costs more directly in that area versus other folks.

But as I think I said a little bit in my speech, and I've said before, we do not fear -- it's a high-growth, high-inflation scenario.

We don't fear that, because we think we have more leverage to pull in managing the inflation than the typical companies.

As David mentioned, we have the 24-hour, the breakfast, et cetera.

We also have a national reach, so, we could have slightly different strategies in different parts of the country.

We have been planning, and I think we're going to continue to plan, that labor inflation is going to be there for awhile.

I'm personally less sure the commodity inflation will be there forever.

Supply and demand tends to work.

I think there's still a lot more productivity in the supply chain in general in China and that suppliers could get more productive.

So, clearly we're going through an inflation bout now.

We can handle it if it's ongoing.

I'm just not sure if it's going to be ongoing.

Thanks.

Thanks, Jeff.

Next question, please, Tina.

Next we will hear from the line of Jason West with Deutsche Bank.

Yes, thanks, guys.

Just wondering what you said, second quarter would be the low point for the US business.

What context do you mean there?

Do you mean in terms of year-over-year EBIT growth, or you mean sequentially, or can you give a little more color on what you mean by that?

Yes.

Probably in most areas.

But, in terms of year-over-year profit growth, even though you saw the first quarter was weak, we expect the second quarter to be worse.

As I mentioned, we're -- Taco Bell -- we're more dependent on Taco Bell than we've been historically.

The sales trends, overlapping a little bit harder numbers in the second quarter, I did mention that since the end of the quarter, our year-over-year trends have actually gotten a little bit worse than what you saw in the balance of the first quarter.

So, based on that, that's going to impact our profitability in the second quarter, and KFC had a decent second quarter last year, and so therefore, our US business clearly, we believe, will have even lower profitability than it did in the first quarter year-over-year.

Okay.

And, then, I guess a little surprised that Taco Bell has weakened as we've gotten away from the lawsuit.

Do you think there's any other issues going on out there with the QSR consumer, that are new anyway in terms of gas prices or whatever it may be?

Yes, clearly that's another factor.

But, it's very clear, if you look at the sales trends, it was very clear that the cause of it was the publicity around the lawsuit.

Just as an example, we were running, we sort of said plus 4% in the first four weeks of the year.

The next week was down a little bit from that because of weather, but we clearly saw that in areas that the weather wasn't bad, our sales were very strong.

So, it was only in areas where the weather was bad, and since then it's been down.

Probably the one thing that was a little bit of bad luck in the process, is that we were running shrimp during Lent.

We think that was the right program at the time, but we had also committed to buying the shrimp during that period of time.

We were planning on that being a big driver.

That turned out not to be the case.

We probably would have been better off if we had a lower priced promotion at that point in time.

Other than that, I don't see anything we would have done differently.

Going forward, as David said, we're looking at all of the options, and I think we have a decent calendar, and I think some of this stuff just takes time.

So, we just need a little bit of time to get further away from the event, and the publicity piece of it, we'll leverage on the front end, we'll see whether that has an impact or not.

That lawsuit was just dropped a day or two ago.

It's too early to tell whether that will have an immediate impact on our sales.

I think what happened to us, as you know, is the Plaintiff's lawyers originally generated a ton of press coverage, giving press interviews and press releases and containing statements about our products that were just absolutely plain wrong.

And, statements far beyond what they even included in their lawsuit, and unfortunately, the press gives far more coverage to the filing of the suits and the making of the claims than it ever gives to the fact that the lawyers have now given up, okay?

So, while we've dismissed the suit, in terms of the ledger or the communication, it's going to be hard to get even.

And, so, it's going to take us a little time.

There's no question, in our industry, having high gas prices is not great, okay?

So, I think all of us are working hard on making sure our value equation is right.

But, the basic Taco Bell brand is strong, and, you can do just -- it is so clear that as soon as that lawsuit hit, our sales took a dip.

It's absolute correlated.

And then, we tracked our users and our purchase frequency and intent to purchase, throughout this process, and during the Lent and the shrimp promotion, it was down, okay?

It had nothing to do with the shrimp, but everything to do with that damn lawsuit.

That, to me, is what we're dealing with right now.

We have a great team working on it, and we'll get back.

We are the value leader, and that's an important thing to be when gas prices are close to $4.00.

So, that's a big plus for us, so the team is working on how to dimensionalize that value as we go forward.

We like where we're at.

We've just been put in the basement for awhile, and now we can get our head up and move forward.

But, the good news on this, I think, it really has allowed us to tell everybody in the world that we're proud of our products, and we are.

Okay.

Thanks for the color guys.

Thanks, Jason.

Next question, please, Tina?

The next question will come from the line of Joe Buckley with Bank of America.

Hi, thank you.

Given that you have higher food cost expectations in China, how are you thinking about pricing going forward, and what is the political and social sensitivity to taking price in China at this point?

Well, as a reminder just for everybody of what we've done so far, we took about a, roughly about a 3% price increase at the end of January, and that's -- at that point in time, we thought it was going to cover about three quarters of the inflation for the year.

To your point, given that inflation has gone up, it's probably now more like 60% to 65% for the inflation for the year.

So, we'll have to assess everything later in the year.

We're not planning on doing anything in the next several months.

We like what we've seen from the sales and transaction perspective, and, we think we've got the overall profitability and value equation pretty good right now.

But, we'll assess later in the year and look at what our options are then.

From a political and social standpoint, is there a lot of pressure not to take price in China?

Well, we were probably late on our last price increase relative to other people.

So, we didn't feel anything when we took -- we didn't feel any resistance when we took our last pricing increase.

Obviously, there's been some feedback that other companies have gotten from the government, and that's something we'll keep an eye on.

I think the biggest pressure we feel, Joe, is just the pressure to make sure that we're affordable to the emerging consumer, and, that's why we like our equation right now, is that we're looking for ways to make our products and our brands more and more accessible.

And, one of the reasons why Pizza Hut is doing so well is that it's eat like a rich man, eat like a poor man.

We've got a -- we even advertise it that way.

We've got something for the everyday consumer.

To go in to KFC and get a six R and B breakfast, that I'm telling you is absolutely delicious and filling, that's great.

That's where we want to go.

If we can figure out how to take our prices lower, especially with the kind of margins we have, that's where we want to be.

We want to make sure that our products are as affordable as possible.

And, we like our position, and we like the formula that we have right now.

Can I ask a quick question on YRI as well.

Same-store sales are a little bit better, but you still seem to be lagging.

A lot of other companies' international businesses, and I'm curious is it a KFC versus Pizza Hut issue or more of an emerging markets versus developed markets?

I think, if you look at the numbers, it's more of the weakness we have in the developed markets versus the emerging markets.

Our emerging market story is extremely positive, and, that's the real growth engine for our company.

We've been -- it's a little of both on the brand side.

We have two developed equity markets that are taking a little bit of -- putting a damper on our performance.

KFC Australia has been under-performing, as has Pizza Hut UK, and those are the two markets.

In the second half of the year, we expect to -- we've got a relaunch of the Pizza Hut brand and the value proposition in the UK, and, with in Australia, we have some very good sandwich type news that we're hopeful is going to be able to turn the business around.

Because, there we have a very strong portable business, and we've got some news that we think could lift the brand up.

So, it's -- our emerging story is strong.

Our developed market, particularly in the two countries I talked about right now, are the issue that we're dealing with.

Okay.

Thank you.

Thanks, Joe.

Next question, please, Tina.

Next we will hear from the line of Greg Badishkanian with Citigroup.

Great, thanks.

Just in China again, how much of the improvement and acceleration in same-store sales do you think was due to the initiatives that you talked about versus maybe the overall industry just picking up ?

I don't know how to answer that.

I don't know if I have anything better.

I think it was a bit of both.

I think clearly we had some very good initiatives.

I think we benefit from having a national presence.

Because the growth, as I mentioned before was a bit better in the outer Tiers, so I think that probably helped our relative performance.

I think it was a bit of all.

Clearly, as we talk about it, I know we're primarily focused on the same-store sales.

But, when we look at China, we also look at system sales, because, again, we're very heavily development dependent and focused, because we want to keep building our business there.

So, when you look at those two combined and you have 24% system sales, clearly, that's more than the category, and, I mentioned our development numbers very were strong in the first quarter, so, we continue to build on our more than 2,000 unit lead versus McDonald's.

Great.

But, we'll just choose, at this quarter, just to say it's all our doing.

The beautiful thing about this, and the reason why, obviously, we're so excited about China, is that, hey, the macros, longer term, are better there than they're going to be in other parts of the world.

So, it's nice to have that as a headwind.

And, that to me -- we just hope that keeps on going.

The more the economy is booming, the more consumers are buying the products.

We're in the right place at the right time.

And, sometimes they say it's -- you're better to be lucky than good.

In this case hopefully we're good and lucky.

You've done a really nice job there.

Thanks, guys.

Thanks, Greg.

Next question, please, Tina.

Next we will hear from the line of Jeffrey Bernstein with Barclay's.

Great, thank you.

A two-part question.

First, on the food court side of things, seems like you guys are not alone in terms of raising your inflation forecast as we move through the year.

It looks like you raised both China and the US by a couple hundred basis points in terms of the basket since just last quarter.

We're just wondering what kind of visibility do you have on that front in the lock versus floating, and the potential that there's further pressure from here and goes up another couple of points over the next couple of quarters?

I'm just kind of wondering for both the US and China, your visibility and comfort on that level.

Sorry, go ahead, Jeffrey.

You have a second part?

Kind of a natural follow-up.

I think we heard you say in China, you have about 3% pricing running through.

I'm just wondering, you said you're not doing anything in the near term.

How about in the US in terms of, kind of the right pricing level?

And, I guess in both of the US and China, how much pricing would you need in an ideal world to protect your margin?

I mean, putting up tremendous comps in China, seeing the margin pressure.

I'm just trying to figure out in this environment, how much pricing you would actually need?

If you look at the exposure this year, I think, at this point, it's pretty modest versus our estimate.

So, it could probably go up a point or two, I would think, pretty much at the most, because we're starting to get more and more locked in, obviously, as we're getting deeper into the year.

The bigger issue is what happens to the trends going forward.

That's what's going to influence what our pricing is, and not necessarily to cover what occurred this year, but are those prices going to continue going forward, we don't have a lot of visibility to that right now.

Clearly in this environment when you have the inflation and, in the US I'm talking about now, when you have inflation and our sales are soft, you have to play it pretty smartly, and, the teams are pretty good at doing that.

Taco Bell, historically, has done a good job of introducing newer products with higher price points, maybe higher penny profit, while still having great value initiatives, and they'll have to continue to do things like that at Taco Bell and they'll have to do that in the other brands.

So, we'll have to take -- we'll probably take some modest price increases, but we'll have to still provide value at the same time.

And, in terms of, I guess, what you're currently running in pricing and what -- if this inflation was sustained, like what pricing would be needed to neutralize that margin?

Yes.

I mentioned before, if you look at the math in China, if you take the inflation that we've talked about on the commodity side and take the inflation that we've talked about before on the labor side, that gives you about a 4.5% or so inflation, and we've taken 3% pricing.

So, that's pretty much what the gap is right now.

Thank you.

Thanks, Jeff.

Next question, please, Tina.

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

Thanks.

Two follow-ups.

One is on China.

In the past you talked about 1% to 2% of the comps coming from things like the 24-hours and the breakfast, et cetera.

Did that accelerate in the first quarter?

In other words, were there more stores open for longer for some reason, or is that still the right way to think about the 13%?

It's a funny quarter for China in that it's two months, and one's Chinese New Year and one's not.

Were the trends on a comparable basis, were they consistent through the quarter, or was this about a very, very successful Chinese New Year?

Yes.

Regarding the second piece first, John, it was pretty consistent during the quarter.

So, we didn't have either a fantastic Chinese New Year and weakness after or before.

It was pretty much constant throughout.

So, we were pleased with that part of it.

We probably picked up a modest amount of extra growth because of further penetration of KFC delivery 24-hours, and the performance of breakfast.

So, breakfast segment performed very strongly during the quarter, but most of the increase versus what you would have seen before is just the overall business performing better.

And can you quantify the impact of the declines or the profit impact of Taco Bell in the US?

Comps were flat.

Were profits actually down at Taco Bell as a result of flat comps, or was it just up less than you thought, and the other brands were, then, more?

Profits went down at Taco Bell.

Can you quantify how much of the decline was responsible -- Taco Bell was responsible for in the decline in profits?

More than half.

Thank you.

Thanks, John.

Next question, please, Tina.

Next question will come from the line of Mitch Speiser with Buckingham Palace.

Thanks, very much.

First off, I believe you did a refi of your $650 million in debt.

Can you give us a sense of how that went?

Was it with cash, or did you do a straight refi?

We just paid off the $650 million of bonds that were due in April.

So, right after the end of the quarter, Mitch.

With cash.

With cash.

Thank you.

Next on YRI, I noticed that the G&A was up year-over-year in the first quarter.

You did re-franchise all of Mexico.

Could you walk us through that?

Do you expect G&A to go down year-over-year due to that re-franchising, or how should we model out the G&A in the YRI segment?

Yes, Mitch, it was basically 4X driven, so, that's the other side of the favorable aspect of foreign currency.

You do get hit a little bit in G&A, so, that was basically the reason.

You had favorable impact from Mexico and the rest of the business, they reininvested some of the proceeds, but the base business was basically flat.

There was a little bit of an increase due to FX.

Okay.

Thanks.

And, on reinvestment, you do have an extra week this year.

I believe last quarter you mentioned you plan to reinvest it.

Have you rethought that?

Is there some cushion to meet the 10% plus earnings growth by not reinvesting that extra week?

This year -- we could use it as that.

We haven't committed to it.

But, our plan at this point, although we're not yet prepared to decide on exactly what that will be.

But, our plan is that we are going to reinvest it.

Okay.

Thanks.

And lastly, on the US business, can you give us a sense at Taco Bell of what percent of your users are light users?

I would have to get back to you on that.

We don't have that handy, Mitch.

We can get back to you.

Okay.

But that is, you think, the key reason why the comps trends did reverse?

We absolutely know that for sure.

Okay.

Thanks very much.

Just forget exactly what that percentage is.

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

Hi, thanks.

A couple of follow-ups, if I may.

The first -- this has been asked a lot of ways.

I would like to try just one more, is elasticity of pricing in China.

I know, in your prepared remarks, you said that it is a sensitive customer to pricing, and perhaps even a sensitive government to pricing.

But, for example, if you were pricing -- if it was 5% instead of 3%, do you think that the consumer is that sensitive to pricing from an elasticity point of view, or do you think you have more pricing power than what you're currently taking?

In other words, that the traffic is there, that you could take pricing and not affect the traffic levels?

Obviously, we make the judgement that we think is best overall.

In terms of the elasticity, when we've taken pricing historically, and it's been inflation driven and the economy has grown, it's been handled pretty well.

We do want to remind people that the Chinese consumer has definitely recovered from where they were, but the Chinese consumer is still a little bit nervous.

If you look at consumer confidence levels, it's one of the measures we look at, over the last four months, that measure has been a pretty weak measure.

So, the Chinese -- and we think that's driven by nervousness around housing costs, et cetera.

So, we do think you have to be sensitive right now to the Chinese consumer.

As David also said, strategically, we also want to make sure we're affordable.

So, I don't want people to think that the Chinese consumer is not sensitive right now to value, because we think they are.

Okay.

Understood.

The second question is on real estate in China, and certainly I respect that 550 is a very, very big number to open in a given year, and from the outside looking in, it's tough to know if you're still getting the access to the quality, meaning both cost and locations of the real estate, that you want.

Are you seeing costs significantly inflate, or are you finding it harder to get sites?

Are you still seeing the new projects being built in the areas in which you want to go?

Again, this is a reminder.

Our historical development numbers have been in the 500 range the last couple of years.

If you look at real estate in general, we are seeing fairly large increases in rents as they become due in Tier -- especially in Tier One cities.

So, in those situations, we have done more relocations and things like that, because it is harder to justify the new rents that you end up paying.

In the rest of the country, rents have gone up, but, not nearly to the extent that they have in some of the Tier One cities.

In terms of access to real estate, the things that have driven historical development, we think are going to continue to drive future development.

And, you're continuing to see huge investments in infrastructure.

We saw something like 40 airports being built in China.

So, things like that continue to occur.

So, we haven't seen any letup in either infrastructure investment or investment in new cities that the Chinese government has been making, so we still see people moving from the countryside to the city.

And, so, with that, you do get new opportunities.

So, what we've said historically -- I think it's true going forward, it's really tied to the economic growth of the country.

If the economic growth of the country continues, we think that the new units will be there.

Thank you.

And, then, the final question just on Pizza Hut, first quarter it was a very strong year for the pizza category in general, a strong year for Pizza Hut.

It was actually the easiest comparison, if you want to call up five easy, but what's the outlook for the year in that brand?

Do you think you can stabilize that business against very difficult comparisons, or might it get pulled down in line with the category, if the category had such an exceptional 2010 that it might just give back some of that share in 2011?

We actually believe that we can have a stable year at Pizza Hut.

So, we're confident in the direction.

Our value proposition is good, and, in the past, we admittedly, we've had some boom splats.

We don't think we'll have a boom splat this year.

Just the way the rough P&L works this year for Pizza Hut in the US, we were expecting about a flat type of year in profits.

As we first sought some modest sales growth would offset the impact of re-franchising.

Obviously, we didn't have the sales growth that we wanted in the first quarter, but we also didn't see any boom splat.

And is there anything changing from a marketing perspective at Pizza Hut that will be notable to turn around that trend, the Q1 trend?

I think one of the big things that's changing versus the past is we have continuity in terms of everyday value.

In the past, we have kind of moved around a lot in that arena, but the system is committed to everyday value.

So, that gives us a base that we never really had before.

We also have a good combination of innovation and value, so you'll see some new pizzas coming to the customers, and, the other thing is we continue to build our early week business with the pasta and the wings.

So, we think we have a good solid approach on Pizza Hut that gives us the stability we need to continue to build a healthy business.

Okay.

Thank you.

Our next question will come from the line of Larry Miller with RBC.

Yes, thanks.

Two quick questions.

I think you said you wanted -- when you were talking about re-franchising KFC, and clearly it was only a few, nine stores re-franchised this quarter, you wanted to put them in the hands of good operators.

Can you comment on the financial health of the KFC system at this point and their ability to absorb that 11% of stores that you want to sell to them.

Well, again, one of the things that makes KFC a little more challenging than the other brands is one is we started later, which we talked about before for various reasons.

The second is the existing franchisees, and we knew this going into it, had less capacity to handle more units.

So, some of the units -- the majority of the units we're actually selling on the KFC side are to external new franchisees, which takes a little longer to get financing, et cetera.

And, obviously, we're going through the screen of making sure that they'll be good at operating the restaurants.

Okay.

But you're confident you guys can hit that target?

Yes.

What we said is our target is ultimately to get to 5%.

We said we probably won't get to that level by the end of this year, but we'll get there eventually.

Okay, thanks.

Just one final question on China.

Clearly double digit traffic growth is amazing for this brand.

I think as long as I've covered it it's only happened, maybe, a few times.

Is there anything different happening from a cannibalization perspective when you're opening new stores, and also can you comment on the maturity curve?

Is that actually giving a greater than expected benefit these days?

What do you mean by the maturity curve?

So, maybe the stores are opening, the stores in some of the Tier Three, Four markets are opening at lower volumes and ramping up a little bit quicker to more mature volumes.

We're not really seeing anything on the second part on the maturity curve side.

Cannibalization?

Yes, cannibalization.

So far nothing really major different there.

If anything, as the percentage of new builds gets lower, we get, maybe, slightly better on the cannibalization front, just from a math standpoint.

We are -- we continue to operate new cities.

So, the number of new cities we're going into is staying relatively constant.

So, as a percentage that's going down a little bit, which works in the other direction.

So, I would say cannibalization, if we put those two together, is slightly better than what it's been historically.

Okay, thank you, very much.

Thanks, Larry.

Next question, please, Tina.

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

Hi, guys.

Real quick, one question I couldn't tell if it's been answered.

In the past in the US you guys have dealt with a lot of challenges to some of your brands whether it was E.

Coli or rats in New York City, and you guys have recovered very quickly and done a good job at managing that.

How has the Taco Bell recovery so far -- is it trending in line with those?

Is there any kind of similarity to that, that shows us that yes, it is recovering and we should see this in X months, or something like that?

Yes.

First of all, I'll be honest.

As David said earlier, I was surprised by the magnitude and the impact, considering it wasn't a real event.

So, if I look at that, I was very reluctant to look at past events, because I thought this was very different.

I still think it's a different.

I think it's different one, because it's not real.

And it's also different because on the negative side, because social media is different today than it was historically.

So, I'll be honest, I don't have a good read for how this is going to play out, but I think studying in depth what happened -- before we sort of looked at that, and we just don't think the circumstances are the same.

Yes.

The circumstances aren't the same, but the issue is that consumers don't have to come to you.

They can go to a lot of different places, so if you look at what's happened, our heavy user, they're extremely loyal.

They love us.

There's no issue.

We've been basically able to keep our heavy user, but lighter users, they go to a lot of different places.

They have their heavy user places.

So, that's the issue that you deal with, and that's why this bogus lawsuit was such an unfair thing to happen to Taco Bell, and our franchisees have been impacted by this significantly as have we.

So, that's what we're dealing with.

Like I said earlier, we want to get out of the basement, out of the ditch, and move forward, but, we just don't know how long it's going to take us.

Okay, fair enough.

I appreciate that.

Thanks, Steve.

Next question, please, Tina.

Your next question will come from the line of Keith Siegner with Credit Suisse.

Thanks.

Just one quick question.

So, you just hosted a bunch of us out in California with Greg Creed to talk about Taco Bell.

We went through a number of strategic initiatives.

Now that the sales weakness is lingering maybe a little bit longer, does this change the backwards integration into breakfast?

Does it change the remodel program timing?

Does it change any of the other things that we learned about, like bigger picture strategic initiatives for Taco Bell, does it postpone them?

Anything along those lines?

Better not.

We're moving forward.

We've got a great vision for Taco Bell.

It's what we talked about in the past.

It's 70% of our US profits.

It's the second most profitable brand in the United States.

We only have 5,000 units.

We think we can have 8,000.

We know we're a long ways from that.

We've got to demonstrate that.

But, we definitely believe we'll be in the breakfast business, we definitely are in the process of remodeling, and we are very bullish on this business over the long term.

We have the number one value franchise in the business, outstanding food, and, we've got a cache even in spite of all this that will come back.

You go to the cocktail parties, kids love Taco Bell.

It's a talked about brand.

We're extremely excited about the long term.

In this business, sometimes you get hit with some things that you just don't anticipate.

But, you're absolutely right, we bounce back, or whoever said that.

When you have great brands, they bounce back.

I mean, there's a great history of that in our country and in the world.

If you're great brand, you might have your hiccups, but you'll come back, and this was -- we'll be waving the flag and charging the hill.

But, the team is focused right now obviously handling this short-term issue.

It's unfortunate when you have to waste a bunch of time dealing with lawyers, when you should be focused a thousand percent on the customer.

We've had to do that.

There's no question about it.

But there's just a few people doing that.

The real Taco Bell army is out there operating restaurants and doing the marketing.

So, we'll get there.

So, anyway.

Sounds good, thanks.

Thanks, next question, please, Tina.

Your next question will come from the line of Sara Senatore with Sanford Bernstein.

Hi, thank you.

Just a quick question on re-franchising.

Obviously, you hold some very strong comps in some of your markets.

But, I'm trying to understand the margin impact.

If you could talk just about the US and also YRI.

We saw last quarter some good benefits from the portfolio management of your stores, and I would have thought we might see that again this quarter.

I'm just trying to understand, can you give an estimate in basis points, what kind of impact re-franchising might be having until you lap some of these big sales of company-operated units?

We looked at it before.

We thought it would be a half point benefit this year.

For both the YRI and for the US?

Definitely US, Sara.

The YRI is a little bit less than that.

Okay, and just another question on the YRI.

Can you help explain the makeshift versus what's going on, because your food and paper costs were down?

You had a very good margin expansion.

Was that all makeshift from one market to another, or is something else going on there?

Are you talking about in the US business?

No, YRI.

In YRI.

The food cost, that was more of an impact of re-franchising, just a shift in the businesses, and it's just a difference in timing of inflation versus pricing.

Okay.

The lag on that.

Okay.

Thank you.

Thanks.

Next question, please, Tina.

Next question from the line of David Tarantino with Robert W.

Baird.

Hi, good morning, and congratulations on impressive growth in China.

A quick question, Rick.

I just wanted to clarify your comments on the earnings outlook for 2011.

I was just curious to know if you can handicap the degree of difficulty you see now in hitting your 10% plus EPS growth target perhaps relative to what you would have thought entering the year.

I know you have a lot of strength in China, but that's being offset by other factors, so, just if you could handicap the degree of difficulty you see now, that would be great, thanks.

Yes, I would say the difficulty versus going into the year is it's harder.

I mean, obviously we -- China sales and profits in the first quarter were in the right direction.

Clearly the US impact we had was in the direction.

But, when you put those together and put into together that we expect a relatively weak second compared to what we normally do, then it's a little harder than it normally is.

Thank you, that's helpful.

Thanks.

Tina, we have time for one more question.

Your final question will come from the line of Andy Barish with Jefferies.

Thanks, guys.

Just wanted to ask David whose cocktail parties those are, the kids or the adults?

Well, they might be some of mine.

I might be changing the audience a little bit --

No, sorry about that.

Just a quick follow-up on as you look at the margin picture for this year, I think you guys had kind of thought about commodities having some risk in the back half of -- I think the number globally was another $40 million.

Is that now baked into the new inflation assumptions, and then, how does what sounds like a little bit of an increase from the beginning of the year, of a focus on value and the marketing and promotional messages around the world enter into the margin thought process as well?

Well, regarding the cost piece of it, I'm not sure where the 40 context is, but let me just repeat what we said and make sure that addresses your question.

To your point, we did take up the commodity inflation in both the US and China.

So, we're now at roughly 7% as our best guess in China, and 6% in the US So, those numbers did go from up what we had at the beginning of the year.

And, I also just said on an earlier question, that we probably only have now modest risk beyond those numbers.

Okay.

Does that answer your question?

Yes.

That's helpful.

All right.

Well, thank you all for being on the call.

Let me just briefly wrap it up.

Our China business is stronger than ever, and with 15% transaction growth this past quarter, we're well positioned for sustained growth ahead.

Yum Restaurants International had a solid quarter, and we expect strong performance for the balance of the year.

Our US business is, indeed, facing a challenging year, and we expect the second quarter to be our toughest and profits to dramatically improve in the second half of the year, however.

Overall, we look for continued strength of our China and YRI businesses to overcome a challenging year in the United States.

We remain confident that 2011 will be the 10th consecutive year we achieve our annual target of at least 10% earnings per share growth.

So, thank you very much.

Ladies and gentlemen, this does conclude today's teleconference.

You may all disconnect.