百勝餐飲集團 (YUM) 2014 Q1 法說會逐字稿

Good morning my name is Gianna and I will be conference operator today.

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

Brands first quarter 2014 earnings conference call.

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

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

(Operator Instructions)

Thank you.

Steve Schmitt, VP of Investor Relations and Corporate Strategy, you may begin your conference.

Thanks Gianna, good morning everyone and thank you for joining us.

On our call today are David Novak, Chairman and CEO and Pat Grismer our CFO.

Following remarks from David and Pat we will take your questions.

Before we get started I would like to remind you that 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 website www.Yum.com to find disclosures and reconciliations of non-GAAP financial measures that may be used of today's call.

We are broadcasting this conference call via our website.

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

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

As a reminder, at the beginning of this year, we combined our Yum!

Restaurant International and US divisions into three global brand divisions; KFC, Pizza Hut, and Taco Bell.

China and India remain separate divisions given their strategic importance and enormous growth potential.

This new structure is designed to drive greater brand focus, greater global brand focus enabling more effective know-how sharing and accelerated growth.

Beginning this quarter, our financial reporting will reflect our new structure with comparable prior periods adjusted accordingly.

Finally, we would like to remind you, of the following upcoming Yum!

investor events.

Our Taco Bell investor day will be in Irvine, California on May 15.

And our second-quarter earnings will be released on Wednesday, July, 16.

With that, I would now like to turn the call over to David Novak.

All right thank you Steve and good morning everyone.

I am pleased to report Yum!

Brands is off to a strong start.

Based on first-quarter results and current sales trends, we expect to deliver on the strong bounce back year we promised of at least 20% full-year EPS growth excluding special items.

We have particularly strong results in China, emerging markets continue to have positive momentum, and developed markets like KFC in the UK and Australia were strong.

However, like most retailers, our US business was soft driven in part by poor weather.

Now as you see the release we're obviously pleased to report our China Division continues to steadily improve.

With both KFC, and Pizza Hut producing strong sales and margin growth.

Driving our first-quarter EPS growth of 24%, prior to special items.

In total, our China Division delivered system sales growth of 17% in the quarter as we opened 123 new units and grew same-store sales by 9%.

The China team deserves special tribute as operating profit grew an impressive 80% prior to foreign currency translation.

As predicted, productivity gains that began in 2013, now coupled with rebounding sales, are driving dramatic profit growth.

Clearly the most significant driver of a strong bounce back year for Yum!

is the continued sales recovery at our KFC business in China, which delivered same-store sales growth of 11% in the quarter.

Remember, this compares to a 4% same-store sales decline during the fourth quarter.

Our China Division also achieved 23.4% restaurant margins in the first quarter.

This compares to a full-year restaurant margin of 15.4% in 2013.

Obviously, seasonality plays a role.

But to put things into perspective, first-quarter restaurant margin for our China Division was essentially in line with what we delivered in the first quarter of 2012.

Anyway you look at it, we're pleased with the progress in China.

Now if you recall, we said last quarter that our focus at KFC China in 2014 was to bring more innovation and exciting news to our customers.

And that's exactly what we're doing.

According to our research, we have regained consumer trust and are now beginning our journey to re-stage KFC as an even more youthful, contemporary, and energetic brand that is innovating for a changing China.

This is built on three pillars, taste, customer experience, and digital.

We are investing behind each of these fronts so the consumer wins.

On March 26, we announced the debut of an exciting new menu at KFC in our more than 4600 restaurants in over 950 cities across China.

This initiative is unprecedented in KFC's 27 year history in China.

And in fact, in the entire QSR industry, as we introduced 15 products simultaneously.

These products are either new, or the return of popular items previously offered on a limited time only basis.

The breadth and variety of these products are expected to further strengthen KFC's leadership in four signature product platforms; sandwiches, rice dishes, snacks, as well as drinks and desserts.

Going forward, we plan to do a similar menu update at least once a year.

Now if you recall, we revamped 20% of the Pizza Hut Casual Dining menu twice a year so we're stealing a page out of the successful Pizza Hut play book.

On the advertising front, we're having a lot of fun using four youthful and popular celebrities who are representing each of the product platforms.

It's early days, but we're pleased with this in its initiative and expect it to drive high levels of ongoing consumer engagement.

Our advertising has already received over seven million likes in the past three weeks.

So clearly were having some fun our customers are enjoying.

Simultaneously, we are launching redesigned packaging, contemporary staff uniforms, new menu boards, and branded service.

On the technology front we've begun rolling out Wi-Fi in a number of other new digital initiatives.

In fact, we will have free Wi-Fi in over 2000 restaurants by year-end, making us what we believe to be the number one retailer on that front.

This is another example of how we are providing customers a more contemporary environment in which to spend their time.

We also have a new mobile app coming which will provide consumers the convenience of pre-ordering with electronic payment.

The goal is to consistently bring exciting and dramatic news to the KFC brand across the year and keep it going.

So let me sum things up for KFC China.

We are early in the year, but we are extremely pleased with the progress we're making with sales and margins and we expect to build off our upward momentum balance of year.

Now as I've mentioned before, Pizza Hut Casual Dining is arguably one of the greatest success stories in our industry in the past three years.

Where clearly the number one Western casual dining chain in China, with hardly any multinational competition.

We have 1100 restaurants in over 290 cities, and we open 43 new stores in the first quarter further strengthening our category leading position.

We are once again pleased with our same-store sales growth which was 8% in the first quarter.

Our pizza and more positioning backed by our strategy to refresh 20% of the menu every six months, as well as offer compelling values is clearly resonating with consumers and driving results.

We are also continuing to leverage our assets throughout the day by expanding our breakfast offering into more and more cities.

Importantly, we have an amazingly strong economic model that generates two-year cash pay backs on new unit openings.

With the terrific performance were seeing we continued to broaden our new unit development of Pizza Hut Casual Dining and are aggressively expanding into lower tiered cities.

Without question, Pizza Hut Casual Dining is a growing powerhouse with a great future.

The other exciting thing about Pizza Hut is we have a distinct home service brand in China where we deliver in all meal replacement to -- home meal replacement to Chinese consumers.

In fact, around 40% of what we deliver is Chinese food.

So not only are we delivering pizza, but were delivering a full array of Chinese menu options.

We now have over 200 units in 25 cities and we're beginning to really scale this brand rapidly across the country.

Importantly it's a high return small box format and sales are almost totally incremental versus our casual dining concept.

So this brand is a separate brand with great potential.

Remember, Dominoes and Pizza Hut home delivery both have about 5000 delivery focused units in the United States today.

With only around 200 units today in China, this brand is clearly poised for rapid growth in the years ahead.

In 2014, we will be testing our Chinese concept East dawning and lower-tier cities and were working hard to turn around Little Sheep which is clearly been a disappointment since we acquired it in 2012 and continues to be so.

Now looking at the long-term, China obviously has a large and growing consuming class which is expected to double from 300 million people to 600 million people from 2020.

We are clearly in the right place at the right time with great brands that are absolutely loved by Chinese customers.

We like how we are positioned in what is still the words fastest growing economy which while slowing, is still expected to grow more than 7% this year.

So in 2014, our new unit development target of at least 700 new stores, remains unchanged as we further capitalize on our leading positions in what remains the number one retail opportunity in the world.

Moving to India, where we're investing in the future in developing a great business which will drive substantial growth for Yum!

in the years ahead.

At KFC we continue to innovate around local customer preferences, and were excited about our second-quarter launch of our new vegetarian line of projects.

We're focused on strengthening our economic model as we expand in the lower tier cities.

Our Pizza Hut delivery business is now outperforming our largest delivery competitor from the same-store sales standpoint.

And at Taco Bell we're making progress developing a scalable economic model with the introduction of a small box format.

And while it's still early days, where confident Taco Bell will eventually be a successful business in India.

Overall, we have over 700 restaurants in our India division, and were full steam ahead with development as we expect to open 150 new units this year.

This is on top of over 150 new units in 2013.

And while country macros haven't been as strong as we'd like, we've made the strategic decision to invest in building each of our brands in the country with well over one billion people.

Now as you know, we recently combined are Yum!

Restaurants International and US divisions into three global brand divisions; KFC, Pizza Hut, Taco Bell.

Our intent is to have dedicated brand teams going to work every day focused only on KFC, Pizza Hut, or Taco Bell to drive each even more aggressive global growth.

In fact, we just concluded our strategic business reviews with each of our new global brand teams and we couldn't be more pleased with how the organization is coming together.

We've also never seen such singular brand focus or higher levels of know-how sharing between the international and US brand teams which is a big competitive advantage.

In early benefit of her new brand structures we expect to set a new development record with over 1100 new international units outside of China and India this year.

Now let me share our perspective on our new brand division results.

Let's start with KFC.

In the first quarter, our KFC division which generates over 90% of its profits outside of the US, delivered a solid first-quarter in the setup for successful year.

As you may know, we have nearly 14,000 restaurants in over 110 countries around the world, 99% of which of these KFC's are franchised.

Importantly, we have a strong track record in emerging markets and we continue to grow our presence with each passing year.

In fact, 46% of KFC division sales outside the US in 2013, were generated in emerging markets compared to 40% in 2008.

During this timeframe, we increased our store sales base nearly 60%.

Looking ahead, our new unit opportunities in emerging markets is arguably the best in retail.

With about two KFC restaurants per million people in emerging markets, we know we have a long runway for future growth.

Moving to our developed markets, we have very solid businesses in Australia, and the UK, which both delivered strong results in the first quarter.

We're really focused on spreading know-how and best practices from these two businesses to our underperforming markets in the United States and Canada.

Now let's talk about Pizza Hut which clearly had a disappointing quarter.

On the positive side, our emerging markets business delivered solid same-store system sales growth of 8% in the quarter.

Having said this, results were negatively impacted by very poor performance in our US business, which contributes about half of Pizza Hut's division's total profits.

Same-store sales in the United States declined 5% in the quarter.

We launched a new and improved hand tossed pizza, but the news wasn't strong enough to overcome value focused competitor activity.

Looking ahead, we expect to fair much better with competitive value, our national advertising and WingStreet, and with product news like our new garlic parmesan pizza offering.

We also intend to do a better job engaging the digital consumer where competitors are frankly doing a better job driving activation.

In fact, we've committed significant additional resources to our digital agenda and I can assure you that we are moving forward with a high sense of urgency.

Outside the United States, we're accelerating new unit development especially across the delivery and express channels.

This is a great example of why we decide to reorganize the business as Pizza Hut now has dedicated brand focus that will drive international expansion at each of the segments.

To sum it up, our top goals for 2014 are to accelerate our pace of global development, and to turn around our Pizza Hut US business.

We intend for Pizza Hut to ultimately become a double-digit profit grower for Yum!

in the years ahead.

Finally a Taco Bell both same-store sales and margin declined in the first quarter while dealing with the challenging weather, higher commodity inflation, and the overlap of 6% positive same-store sales in 2013, which was our strongest quarter of last year.

While the quarter was below are ongoing expectations, we remain confident Taco Bell has all kinds of mojo going forward as we expect another strong year.

The big news for Taco Bell is that on March 27, that's the day which falls in the second quarter, which went down in history as the day we launched our national breakfast platform.

I'm pleased to report were off to a great start and we are generating tremendous buzz around our advertising and products.

I encourage you to try our AM Crunch Wrap, Waffle Taco, and Cinnabon Delights.

We have talked about products and talked about advertising in a breakfast line that is driving rave reviews for quality, portability, and value.

Looking ahead, will be introducing mobile ordering a Taco Bell and we have significant innovation planned for our core business that we believe will allow our customers in 2014 including a major new product launch in the second half.

Our ongoing product innovation is backed by solid operations in strong unit economics which allows us to open at least 100 net new units this year on top of 78 net new units we opened in 2013.

As you know our US business represents 97% of Taco Bell's global profit.

We now have a dedicated international leadership team and have made additional investments in G&A to unlock the enormous development opportunities in front of us.

Given the power of the brand in the US and its success in several other markets we believe Taco Bell will eventually become our third global brand.

Taking a step back, when you look at Yum!

in total there are two important things to keep in mind.

Number one, we are largely a franchise business as over 90% of our restaurants outside of China are owned and operated by franchisees.

In 2014 we will generate about $2 billion in franchise fees which is a $1 billion increase since 2004.

We simply love the franchise business model as it's about as high return business as you can possibly have.

Number two Yum!

Brands is the clear restaurant leader in emerging markets.

And we expect to build upon this position in the years ahead.

And while we know emerging markets will have their ups and downs, we remain extremely bullish on our long-term prospects in these countries as the consuming class rapidly expands.

Remember, emerging market economies are expected to grow at almost three times the rate of developed market economies for the foreseeable future.

Also remember, we only have two restaurants per million people in emerging markets.

This compares to about 58 restaurants per million people in the United States today.

That's a long runway for growth and gives us tremendous confidence in our ability to continue our aggressive expansion for many years to come.

So let me wrap things up for Yum!

Brands.

On the whole, we're off to a strong start to year.

We are extremely pleased with our continued momentum in China, and we had impressive results in a number of other markets.

As Pat will tell you on a new division basis, we had a solid quarter KFC, Taco Bell was off to a slow start, but we're confident in the brands positioning and plans balance of the year.

And we obviously have major work to do to get Pizza Hut on more competitive footing and were confident we will do so.

All in all we believe were well-positioned to deliver on the three things we know drive shareholder value in retail.

Driving new unit development, building same-store sales growth, and doing these in a way that generates high return.

Were confident we will have a strong bounce back year in 2014, growing EPS at least 20% and reestablish our track record of consistently delivering double-digit earnings-per-share growth in the years ahead.

Now let me hand it over to Pat Grismer our CFO.

Thank you, David.

Good morning everyone.

We're pleased to report strong first-quarter EPS growth for Yum!

Brands led by outstanding performance at our China Division.

This combined with current trends and balance of your initiatives for all our divisions, gives us confidence to reaffirm our full-year guidance of at least 20% EPS growth excluding special items.

We're also continuing to make investments that position us well to drive double-digit earnings growth for many years to come.

Today I'll provide some additional perspective on our first-quarter results, and share our outlook for the second quarter and full-year.

I'll then talk about what we're doing to drive long-term value for shareholders.

For the first quarter we reported 24% EPS growth before special items.

This increase was led by significant sales, margin, and profit growth at our China division.

We also have solid operating performance at our new KFC division.

However, these results were partially offset by disappointing results at our new Pizza Hut division and at our Taco Bell division, which was adversely affected by unusually severe weather in the US.

Now I'd like to dig a little deeper into each division's first-quarter results.

In China, operating profit increased by an impressive 80% prior to foreign currency translation.

This performance was driven by same-store sales growth of 9%, and nearly 7 points of restaurant margin improvement versus prior-year.

Given the challenges that we experienced in 2013, the single most important driver of a strong bounce back year for Yum!

is continued sales improvement at our KFC business in China.

With the 11% same-store sales growth in the quarter, it's clear that we're building momentum with this business and we're pleased with the overall progress were making at KFC.

Based on improving sales, and the recovery we've seen in key consumer metrics at KFC, we reaffirm our 2014 guidance of high single, to low double-digit same-store sales growth for the China division.

At Pizza Hut Casual Dining in China, system sales grew 30% including unit growth of 23% and same-store sales growth of 8% for the quarter.

We are confident 2014 will be another outstanding year for this business as we continue to accelerate new unit development, expand breakfast into more and more cities, and leverage our assets even further throughout the day.

Now as pleased as we are with China sales I have to say where even more pleased with China's restaurant margin topping 23% in the first quarter.

Excluding an approximate half-point negative impact of Little Sheep, China division restaurant margin was actually slightly above what it was in the first quarter of 2012.

This outstanding result reflects operating leverage from positive same-store sales, new pricing actions taken late last year, and significant gains in restaurant productivity which further extend and build upon efficiency we realized in the second half of 2013.

We continue to drive higher restaurant operating efficiency through improved store level sales forecasting, better labor scheduling, and more effectively optimizing operating hours at selected locations.

Importantly, we've accomplish this while maintaining our high standards of customer service.

I'd like to take this opportunity to congratulate and thank our China restaurant operations team for their breakthrough performance in achieving new levels of restaurant productivity.

Shifting to development, we opened 123 new restaurants in China during the quarter, including 68 KFC's and 43 Pizza Hut Casual Dining restaurants.

Over 70% of these new units were built in tier 3 through 6 cities where our unit economics and returns are strongest.

So to summarize the progress were making our China business, at KFC, we continue to see sequential improvement in same-store sales growth, and consumer brand attribute scores are essentially back to 2012 levels.

Additionally, we delivered strong restaurant margins in the quarter and are seeing significant improvements in new unit performance.

At Pizza Hut Casual Dining, we continue to have strong same-store sales growth.

With AUVs higher than KFC and full-year margins above 20% we're generating two year cash pay backs.

We're aggressively investing behind this growth engine while also increasing our pace of development with Pizza Hut Home Service which is compelling unit economics with the smaller investment.

These results give us confidence that will not only achieve our full-year target of high single to low double-digit same-store sales growth for a China division, but will deliver significant full-year margin improvement as well.

Overall, we're pleased with our progress and confident our China Division will continue to be a major growth engine for Yum!

Brands for many years to come.

Now let me talk about our three new global brand divisions starting with KFC.

Our new KFC division includes all KFC units outside of our China and India division.

To put this division of perspective, KFC division contributed 29% of Yum!

total operating profit in 2013, 91% of which was generated outside the US.

Additionally, as of the end of Q1 91% of KFC stores were franchise.

For the quarter, operating profit increased 4% excluding foreign currency translation.

Operating profit growth was negatively impacted by 4 percentage points with the lap of one time fees from a franchise ownership change in Malaysia in the first quarter of 2013.

Excluding this item, KFC's operating profit grew a solid 8%.

In the quarter, KFC opened 80 new restaurants including 77 new international units.

Our franchisees continue to lead the way with development opening 88% of these new units.

As a reminder, similar to previous years we expect our new unit development will ramp up significantly as the year progresses.

Same-store sales grew 1% in the quarter.

These results were softer than we would've liked, as weak performance in the US and Thailand partially offset strong same-store sales performance from the UK, Russia, South Africa, and the Middle East.

In our international markets, same-store sales grew 3% in emerging markets and 1% in developed markets.

In the United States, same-store sales declined 3%.

KFC operating margins was relatively flat versus prior-year as the benefits of same-store sales growth and franchise development were offset by the prior-year lap I mentioned, as well as a slight decline in company restaurant margins.

Moving to our new Pizza Hut division which includes all Pizza Hut units outside of our China and India divisions.

Pizza Hut division contributed 15% of Yum!

total operating profit in 2013, 54% of which was generated in the US.

Additionally, 94% of Pizza Hut units were franchise as of the end of Q1.

First-quarter operating profit declined 14% versus prior-year, operating profit growth was adversely affected by 5 percentage points from the lap of UK pension plan benefit realized last year.

Excluding this one time item, Pizza Hut operating profit declined a disappointing 9%.

Pizza Hut opened 69 new restaurants including 39 units opened outside the US, 87% of these units were opened by our franchisees.

Same-store sales declined 2% in the quarter driven by a 5% decline in the US, which accounts for about half of our Pizza Hut store base.

For international markets, same-store sales grew 3% in emerging markets and 1% in developed markets comparable to KFC.

Pizza Hut operating margin decreased approximately 6 percentage points for the quarter, due in part to the decline in same-store sales and about a 4 percentage point drop in company restaurant margin.

Additionally, about 2 percentage points of the operating margin decline was attributable to the pension overlap I mentioned previously.

The restaurant margin decline was driven by sales deleverage and higher-than-expected commodity inflation in our US business where as I mentioned before the majority of our company stores are located.

We also made strategic investments in the field level G&A to open new Pizza Hut markets in drive higher levels of development.

As I'll explain later, we don't expect first-quarter results to be indicative of Pizza Hut's performance balance of year.

Moving to our new Taco Bell division which includes all Taco Bell units outside of our China and India division.

Taco Bell division contributed 21% of Yum!

total operating profit in 2013, 97% of which was generated in the US.

And as of the end of Q1, 85% of Taco Bell stores were franchise.

Taco Bell's reported results for the first quarter were clouded by a number of factors.

But we don't expect these results to be at all representative of full-year results.

First-quarter operating profit declined 16% versus prior-year with a same-store sales decline of 1% on the heels of eight consecutive quarters of same-store sales growth.

We estimate that unusually severe US weather impacted first-quarter same-store sales by about 3 percentage points.

Additionally, operating profit growth was negatively impacted by 5 percentage points due to a franchise incentive related to our national breakfast launch.

While operating profit was impacted more than you'd expect on a 1% same-store sales decline, it's important to note that our company stores are more heavily concentrated in weather impacted geographies and thus underperformed the system average.

In addition, to the incremental sales deleverage restaurant margin was further impacted by a relatively high mix of labor-intensive and promotional products as well as higher-than-expected commodity inflation.

This yielded about a 2.5 percentage point decline in restaurant margin for the quarter.

We view this as a temporary phenomenon and expect second-half performance to be much stronger than the first, as innovation lead sales growth, promotion led mix shift, and new pricing actions deliver improved margin performance balance of your.

On the development front, Taco Bell opened 28 new restaurants in the quarter with 27 of these new units opened by our franchisees.

So in summary for Yum!

Brands our 24% EPS growth for the first quarter was consistent with the guidance that we provided in February to be roughly in line with our full-year EPS target of at least 20%.

And while our Taco Bell and Pizza Hut results were softer than we would've liked, this is more than offset by strong performance in our China Division.

For the second quarter, we expect EPS growth to be our highest of the year.

Remember, in Q2 of last year, the KFC, China, poultry supply incident and news of avian flu weighed heavily on China division results, making the second quarter our low point of the year from an EPS growth perspective.

We'll have the benefit of overlapping these weak results this year combined with the tailwind from upward sales momentum at KFC in China and continued strength in China restaurant margins.

We also expect much better sales results from Taco Bell with our recent breakfast launch; however, Q2 profit growth at Taco Bell will be moderate as commodity inflation will continue to pressure restaurant margins although not to the extent we saw in the first quarter.

And finally, we expect KFC to remain solid and Pizza Hut to show improvement in the second quarter.

Now before I talk about full-year expectations, I want to provide some context for China restaurant margins and how we see this evolving balance of year.

First, I want to caution you not to extrapolate our first-quarter margin gains for the full year.

Bear in mind that with respect to China restaurant margins, Q1 marks the easiest overlap of the year.

Additionally, we began to implement new productivity measures during the second quarter of 2013, so we'll begin to overlap some of those benefits this quarter.

And finally, we just launched an extensive menu revamp which will add some initial labor complexity including training costs and a slightly higher food cost mix.

All that said, we're confident in our ability to make significant full-year margin gains in China.

In addition to the labor efficiencies I've mentioned, we've continue to optimize operating hours at KFC and are seeing stronger new unit margins with the increasing weight of our development program toward lower tier cities and toward Pizza Hut Casual Dining.

We also took about three points of pricing at KFC and two points of pricing at Pizza Hut Casual Dining last year, which should benefit the full-year.

At our December investor meeting, we indicated that China division margin would improve between 1 and 3 percentage points from 2013's full-year restaurant margin at about 15%.

Based on our strong start to the year and each of the items I just mentioned, and with expected full-year division same-store sales in the high singles to low double-digit range we've guided, I'm confident that China division's restaurant margin will be at least 17% for the full year.

So now let me share our expectations for full-year 2014 which as I mentioned last quarter will look different from our ongoing growth model.

This year, we expect the growth rate for our China Division to be significantly above its ongoing target of 15% this year, or about 40%.

As sales at KFC China continue to improve, we expect China Division restaurant margins will continue to benefit from operating leverage as well as from productivity initiatives and pricing.

We also expect another strong year at Pizza Hut Casual Dining.

And on a development front we expect to open at least another 700 new units in 2014.

Looking at our new brand divisions, we expect KFC's growth rate to be above its ongoing target of 10%, Pizza Hut's growth rate to be below its ongoing target of 8%, and Taco Bell to be in line with it's on growing target of 6%.

Just as we mentioned in December.

And while Taco Bell and Pizza Hut both had a slow start to the year, we expect Taco Bell to make this up in the balance of the year with a strong second half supported by breakfast, new product innovations, digital initiatives, and additional pricing actions.

However, it's likely that Pizza Hut will trail our previous expectations although we do expect significant improvement from our first half as we sharpen our marketing, improve our digital execution, and accelerate the pace of new unit development globally.

All enabled by our new global brand structure.

When you add it all up, we expect at least 20% EPS growth in 2014.

Now before we open up the call to questions, I'd like to talk about how were financially wired to generate strong returns for our shareholders.

First, with a strong and steadily growing cash flow that we generate from our global franchise business, and from our high return equity businesses, we reinvest a substantial portion about 40% in new growth opportunities, largely new store openings.

With the changes we've made to our store ownership profile over the years, through a combination of new equity businesses and re-franchising.

These new stores are increasingly skewed to emerging markets which offer superior returns and significant growth potential.

Thus laying a strong foundation for future earnings growth.

Second, we pay a dividend which we've grown at a double-digit rate every year since we first paid a dividend over nine years ago, making us 1 of only 10 companies in the S&P 500 to do so.

This is delivered an annual dividend yield of about 2% which is very competitive for a company with our growth profile.

Third, we don't hoard cash.

After covering our growth investments in dividends we return all of available cash to our shareholders in the form of share repurchases.

Based on the track record of our stock over the years, it's fair to say that these buybacks have created enormous value for our shareholders.

All three of these levers: growth investments; growing dividends; and value creating share repurchases work together to drive strong returns for our shareholders.

So let me wrap things up.

We are pleased with our strong first-quarter results specifically at our China division.

It's evident that the actions we took a 2013 to strengthen our business coupled with our ongoing growth investment, has set us up for a strong bounce back in 2014.

Looking at our three new global divisions, KFC is off to a solid start, Pizza Hut is in turnaround mode, and Taco Bell's year will be more of a first-half, second-half story as we continue to build momentum with this exciting brand.

In addition, we continue to strengthen our position in high-growth emerging markets as we capitalize on low levels of unit penetration and the growth of emerging economies.

I'm confident in the strength of our business model and will continue to make the investments necessary to sustain double-digit EPS growth over the long-term.

And with that we will be happy to take your questions.

(Operator Instructions)

Your first question comes from Joseph Buckley with Bank of America your line is open.

Thank you.

Pat can I ask you will to elaborate a little bit on the China margin comments?

I mean you're effectively saying up at least 17% you're staying within the high range of the prior 130 to 300 basis points improvement over 2013.

Would you walk through some of the key elements food cost inflation, labor inflation maybe what he saw in both of those in the first quarter, what you're thinking for the second quarter and what you're thinking for the balance of the year?

I'd be very happy to do that, Joe.

As a reminder, on our Q1 margin in China improved about 7 points; more improvement in KFC than in Pizza Hut, but both improved.

Same-store sales contributed about 6 points of margin improvement, which included about 3 points from pricing, but the balance from sales mix in transaction leverage.

Importantly transaction, same-store transactions grew in both brands.

We also got a 3 point margin benefit from restaurant level labor productivity.

And our new unit development program also improved our division margin by about 1 point.

So when you add those up that's about 10 points of margin benefit.

Offsetting that was about 2 points of pressure from inflation that included the relatively flat commodities and about 7% inflation and labor.

And another margin point of pressure from Little Sheep and from rent.

And when you add those together that's how you get to about 7 points improvement in the division.

Now as I mentioned, we don't want anyone to extrapolate that the balance of the year.

But based on everything we've outlined in terms of the ongoing momentum in our sales, the continued productivity initiatives, pricing actions that may happen balance of the year, plus we know about the commodity outlook.

We do expect to be at least 17% for the full year, which is about 2 points better than last year's full-year result.

So Pat what are you expecting for commodities and labor if you can get me this granule for the second quarter and then for the balance of the year?

Well we do expect commodity inflation to edge up a bit.

Our full-year guidance is in line with what we communicated in New York, which was low-single digits.

Labor admittedly was a little bit light on inflation in the quarter at 7%.

We still expect on a full-year basis to be in the low-double digits so we expect that labor inflation will nudge up over the course of the year.

Thanks, Joe.

Gianna next question please.

Your next question comes from Brian Bittner with Oppenheimer & Company your line is open.

Thank you.

I've just got two questions one on China and one on Taco Bell.

For China can you just talk a little bit more on the restage here.

Just the new menu and the marketing you know between the higher cost of sales mix and the investment training, first question is how many basis points, do you think this will be a headwind of margins versus what we saw in the first quarter?

And also anything you can say on the sales reaction since the restage would also be helpful.

Brian, this is Steve.

On the menu restage, it's too early to tell exactly with precision what the impact will be on food cost but we do expect it to be slightly higher based on our expected mix.

And from labor standpoint, I don't think it will be a very material piece of increase in the labor lines.

But with any new product offering, there will be labor training cost that will hit in the second quarter.

I think just from an overall marketing standpoint we launch the new menu on the 26th.

We began the national advertising on the 2nd.

The overall objective is to restage KFC is even more youthful, more energetic and is innovating along with the ever change that's going on in China.

The fact is that we launch 15 products simultaneously.

That's the first time we've ever done that in KFC's 27 year history and I don't think anybody in the QSR industry has done that.

We basically try to steal a page out of the successful Pizza Hut play book where we've revamped the menu twice a year 20% of the menu twice a year.

And of the 15 products, 15 of the products are either new or they're returns of popular items that were previously only offered like on a limited time only basis.

As I said in my remarks, there are four signature product platform; sandwiches, rice dishes, snacks, drinks and desserts.

So we're obviously increasing the amount of variety that's offered at KFC and, while it's early, we're pleased with the initial results.

We've had great consumer feedback on our new roasted chicken burger, our teriyaki chicken flavored rice, flavored roast wings, we've got a great drink that seems to be a very popular; our sparkling apple juice that people really are responding very favorably to.

One of the things were trying to do this year is really take the offense and bring a lot of fun and excitement back to the KFC.

Last year we were more on the defensive position and this year we're really trying to bring fun and excitement.

We've signed up four very popular youthful celebrities.

We've got digital marketing and engagement and we've already had 7 million likes in the past three weeks, so we feel good about that.

And this is a very holistic approach that were taking in the restage.

If you walk into our restaurants today, you're going to see new team members with new contemporary uniforms that they really like.

We're rolling out new packaging as we speak, we have new menu boards, we're adding Wi-Fi in a lot of our restaurants, with the ultimate goal to have all of them, about 2000 restaurants, with Wi-Fi, by the end of the year.

And we've got digital mobile applications coming.

So this is a holistic approach.

We're really trying to drive a lot of excitement, a lot of news behind the KFC brand.

And I think that, just the fact that you get 7 million likes from your marketing in three weeks, just shows how big and ubiquitous this brand really is.

I mean, people love the brand.

As you guys all know, if you've followed us, we been ranked number one brand in China for a number of years.

And so that strength has never left us and what we're trying to do is leverage it even more as we go into the future.

So very excited about KFC, the progress that we're making, and the progress that we will continue to make.

Thanks Brian.

Gianna, next question please.

Our next question comes from David Tarantino with Robert W Baird.

Your line is open.

Hi, good morning.

Another question on the China business, maybe more specifically.

I've think you use the words upper momentum in the KFC business, and I'm just wondering if you could give us maybe a directional update on what you're seeing so far in Q2 in terms of the comp for either KFC or the division?

Yes David you know we never really give out specific numbers as it relates to current trends; however, what we have conveyed is that we're very encouraged by, not only the results we saw in Q1, but how those results have sustained into Q2.

And what we seem to be the early response to the conference of restage of the KFC brand.

In my view, comps don't tell the whole story.

One of the things we look at is the absolute average we de-seasonalize transaction volumes and what we see there are sequential improvements.

And it's based on Q1 results and what we observe from current trends that give us the confidence to reaffirm our full-year guidance for same-store sales growth of high singles to low double-digit growth here

Great that's very helpful and then maybe another question on the margins.

It seems like you've gotten a lot of encouraging productivity enhancements and I'm just wondering where you are in the stage of that initiative whether you think you've gotten all you're going to get or if there's more on the table in terms of productivity gains?

Well, as I mentioned, we started to initiate these productivity measures in the second quarter of last year.

So as we make our way into Q2, we begin to overlap some of those.

However, we also picked up a momentum on some newer productivity measures towards the end of last year and those have continued into this year.

So we expect that productivity will be a significant contributor to our full-year margin performance, although we would not extrapolate the gains from Q1 to the full year.

But it's been from a number of things, there's not been any one thing that is driven that result.

We are much sharper in the way that we forecast sales at the store level.

That puts us in a position to do a much better job of scheduling our labor so that we're more efficient in a way that we deliver service to our customers.

And we continue to rationalize operating hours at selected restaurants, in ways that ensure that we are growing profitable transactions increasingly profitable transactions.

All of those things really have come together to deliver what we consider to be an outstanding result and will help us achieve at least that 17% restaurant margin for the division this year.

The only thing I'd add on that is that the mindset that we have in our company is to always be unfilled finish business on productivity.

Okay, we're constantly looking at every process in ways to incrementally improve and hopefully make the quantum leap wherever we can.

So we're organized globally around operations best practice sharing, and I think anything that we pick up in any market that works, we share with other markets.

And we expect to make continued progress on this front.

Thanks, David.

Next question, please, Gianna

Next question comes from David Palmer from RBC capital markets.

Your line is open.

Hey, this is Eric Aldous in for Dave Palmer.

I just want to ask you two quick questions here.

You have got new menu and marketing in Taco Bell and Pizza Hut, which has likely impacted second quarter.

Are you seeing an acceleration in any of these divisions lately?

Any numbers or additional color on how these initiatives would be pretty helpful.

And then also would like to ask you about your repurchase plans and targeted leverage in the near-term?

Well I think on the Taco Bell front, as you know we just launched breakfast.

We're very pleased with the initial results.

It's too early to really go into details on that.

At Pizza Hut you know we've recently launched garlic parmesan pizzas and WingStreet and we're pleased with the results that we've had with both of those products.

So I can't really give any specifics on the actual sales trends.

And then on the financial structure question with respect to the repurchases consistent with what we outlined in New York.

We expect share repurchases to contribute about 1 point of EPS growth so we're still on track to do that.

And then, as it relates to our capital structure, we're happy with where we're at with how we are positioned from a leverage perspective.

And, as you know, we completed a successful refinancing of about $600 million of debt in the fourth quarter of last year, which we believe created significant value for shareholders.

So were happy with where things stand on the capital structure basis.

This is something we continue to look at we believe that we're in a sweet spot.

Thanks, Eric.

Gianna, next question please.

Your next question comes from Jeff Farmer.

Your line is open.

Just touching on Taco Bell breakfast again, but a little bit different angle here.

So I'm just curious what you've learned about your talk about breakfast customer over more the extended test period.

So are these existing customers coming into the restaurant or the increasing their frequency, or, again are you attracting new customers altogether?

And does a breakfast visit from a Taco Bell customer, someone who's really loyal, do you see them essentially doubling down coming to the restaurant twice on some occasions how should we think about that Taco Bell customer and breakfast?

First of all the test markets and what we've seen to date the business is incremental.

So it brings incremental usage.

Now the great thing about Taco Bell is the Taco Bell users are heavy breakfast users.

I think they compose 75% of heavy breakfast users.

It's an amazing number.

So just getting people converted into Taco Bell users to breakfast for a new different incremental occasion, that's really our closest opportunity.

I was just in Phoenix a couple weeks ago where we've been in test food for two years.

And what was startling to me was how many people didn't know we were in breakfast until we launched our new advertising.

So I think what we learned last couple years is we can get a profitable proposition, but it's really going to be challenging to break through the clutter and get people to be aware of your breakfast offerings and get them to try.

We think we've really done that with the recent advertising which is very talked about, and when I was talking to customers they were saying that they've seen the advertising and enjoy and they came in and tried it.

And I think the good news we feel the thing that we're most -- and we've learned this from test markets and also with the launch.

People love our product.

You know we've got if you look at the AM Crunch Wrap it's very portable.

It is the most portable breakfast product in the category.

And it's been tested up against a like product with competition and we win with better value.

The Waffle Taco similar, I mean there's nothing like a Waffle Taco it's a novelty product in a sense that it's so interesting.

If you just go online people are talking about both of the AM Crunch Wrap and the Cinnabon Delights, I don't think you can eat just one.

I mean these things are great.

And we've developed one of the things we realized we needed to have with breakfast, in test markets, we need to have good coffee line of products and we have great coffee with flavored options which people really like, and we think that, that segment will grow over time.

The good thing is that our franchisees are very excited about this.

They're excited about Phoenix.

I was in Columbia, Missouri, this last week.

I was meeting with our franchisee there.

They have 17 stores.

They were I think actually doubting Thomas's of breakfast.

But I think they've been converted.

Because the people really like the products.

Good products, good value, minimum investment.

Remember we were able to do this without significant capital expenditures, so you know we think we're off and running.

We want to emphasize that we know this is not a lay down.

I just talked about the fact that we were in Phoenix.

I was in Phoenix and we have been there for two years and people didn't even know.

Okay now we have already achieved breakeven and we had a solid breakfast platform to go forward with, but customers didn't know about it.

So we have got to break major habits.

People have the tendency to do the same thing every day.

So it's hard even to get our current users to give us a try.

But I think the team is doing it in a very innovative and exciting ways from a marketing standpoint.

We actually trained for breakfast.

We did more training for the breakfast rollout than anything we've ever done for an operational standpoint.

We had rallies all around the United States.

The team is pumped up.

We are not in it to be in breakfast we are in it to win at breakfast.

And we have great products today that have gotten us into the game, we have a lot more products that we can go to when we want to that are derivatives off of what we've done, plus some new products.

So early days I don't want to get too excited about it, okay, because we know the challenges is immense.

But I've always said, that if we can be successful at breakfast, and we fully intend to be, there's no reason in the world why Taco Bell can't go from 5000 stores to 8000 stores in the United States.

So our goal is to add that $100,000 plus concept layer that really takes an already high returning business to a whole different level and we get much more rapid new unit development.

This year we will add over 100 net new units at Taco Bell on top of I think around 80 last year.

So are picking up speed, you know the development pipeline is getting better, and the enthusiasm is very high on this.

But the proof is still in the pudding.

Thanks, Jeff.

Next question, please, Gianna.

Your next question comes from John Ivankoe with JP Morgan.

Your line is open.

Hi, thanks.

I'd like to take the opportunity to ask two questions if I may.

First, philosophically when you look at China margins it does look like labor hours per store was actually down in the first quarter and that's despite the higher traffic that you saw at the brand.

And cost of goods sold was the lowest I could find at least back 10 years maybe even more than that in the division.

In kind of the context of having a recovery and trying to do a better job for your customer and the employee, you know is there any thought of reinvesting some of that margin and giving a better store level experience, or is it kind of what we saw in the first quarter and letting the store level economics really earn, is that the right thing for you guys to pursue over the next couple of years?

And I asked that in the course of the context of getting back to a 20% margin, which I think was your long-term goal a few years ago.

We fully expect, over time, to get back to that 20% margin.

That's the goal.

And we think we're going to get there primarily through sales leverage.

You know as we take the sales up we think that will be the number one beneficiary.

The one thing that we believe more than anything, is, and we've done this from day one in China, is we will never sacrifice the customer experience for any kind of margin.

That's just not going to happen.

I mean in the last four months, we've retrained every one of our team members on our standards, okay, on our expectations, on what we're doing.

We're investing in the consumer proposition and our customer measures all say that we have been able to do it quite successfully, and you know, the magic of this business is the magic at the end.

You want to get the sales growth you want to get the margin growth.

And that's what I think we're demonstrating we have the capability to do there.

But make no mistake about it, the primary thing we have to do is make our customers happy.

I mean we have to make our customers happy and bring them back again and again and again.

One of things we train people on, John, is a branding experience.

Let me give you an example of that.

What were focused on is branded service in China.

This is part of the restage and I didn't talk about it, but I'm glad you bring it up because it does have operational implications and we've taken the time to train everybody on this.

But when you walk into a store in China, everybody raises their hand automatically and says, ne hao, you're welcomed as a customer.

We've learned that one of the things you want to do is we want to make our customers feel valued, so when we take the money from and give the money back to our customers we give it to them with two hands.

That's just a recent thing that we just added because we want to help people and we thank people for coming.

And just like they do a Chick-fil-A.

It's been a pleasure serving you.

We actually picked that up from Chick-fil-A here in the United States.

We build that into our branded service experience.

So those are just two things that we're trying to do every single time, so that the customer feels it.

So I think the big thing to think about our restage is that this is a re-look at everything we do to make it better for the customer.

More product variety, more -- better uniforms, better environment through things like Wi-Fi.

We're also -- this year we'll be consistently upgrading our restaurants in a number of stores major cities and showing new designs that we've created.

Because the only way you win it from the long-term and the short-term, obviously, is you got to make customers happy.

We're on just a mission to do that.

So I think we are investing, I know are investing in the customer proposition.

Just specifically to get at your question around what was happening with cost of sales when you look at the year-over-year decline.

You may recall that last year, in the wake of the challenges we experienced at the end of 2012, we introduced some value offers, some discount offers in an effort to stimulate traffic.

So we're lapping that this year.

Also, as I mentioned, we took some new pricing actions at the end of 2013 after going without pricing at KFC for over a year.

And we felt that we had room to do that based on the recovery that we saw in key consumer metrics.

And the good news is, at the end of the first quarter, in our value scores continue to be very good, and we've maintain our pricing on the value anchors, which are critical to maintaining that strong value position with consumers.

And of course, you do appreciate the question, when you look at record gross margins and declining labor hours per store, you at least have to ask the question whether in fact that customer value position is going up.

And if you say it is, it is.

I've always appreciated your knowledge of the category, John.

Thank you, David.

And secondly if I may -- KFC, and thank you for the transparency it's great I mean I love to see it.

But when you look at the company store margins there and, especially with the majority of company stores outside of the United States, could you give -- is there a different experience at the company stores are seeing in KFC versus for example the franchisees?

Obviously you don't pay a royalty in those company stores for KFC so are the franchisees seeing different economics on the margin side as those franchisees grow?

Because I don't think you would be growing many KFC stores with the margins in the low-double digits.

John, this is Steve.

The economics still remain strong and in fact with the comments we actually took our international developed number up and that's the number that's both for KFC and for Pizza Hut from our initial guidance.

So your economics are strong and you continue to expect strong developments.

I'm sorry, John, bear in mind what you're seeing is a global average and there are differences in the profitability of new units in emerging versus develop markets and where more of our growth is coming from is in the emerging markets where the unit development is stronger -- where the unit returns are stronger.

And if you have done this before, I apologize, but can you quantify that difference of kind of the growth markets versus the established markets?

We talked about pay backs before especially in some emerging markets and they are very attractive returns.

If they weren't, the franchises wouldn't be growing.

I understand.

Thank you so much for your time.

Thanks, John.

Next question please, Gianna.

Remember we're going to have -- across the board, we'll record levels of development this year; 1250 international units outside of China.

And that only comes if you have -- remember 90% of what we -- outside of China is franchise owned.

So they're only going to invest if they're going to be getting good returns.

And I think they are important point is that the margins that you see that are low are primarily in developed markets.

And the emerging markets we get cash on cash returns within 2 to 4 years.

Next question please, Gianna.

Your next question comes from Keith Siegner with UBS.

Your line is open.

Thank you.

I like to follow up on that KFC China restaging and I appreciate the focus on being more youthful and energetic and the 15 new products.

But to ask it slightly differently, is this restaging in these new products, is this outright menu expansion, is a more premium focused, more value, is there any change in the stay part focus?

Any color on that.

And, I guess, Pat, what I would ask you is, do you expect any mixed impact from this restaging on how your same-store sales develop throughout the year?

Thanks.

I think that, first of all, these products are more premium in nature, they're not value products.

So they're high-quality premium price products.

We now have I think 66 total options at KFC, compared to 59 that we had before.

We removed seven items, updated one, and we increased.

So I think you know we try to optimize our menu.

But the products themselves are more premium in nature.

And one of the things were doing in China is, we want to have entry price points that are very value-oriented at breakfast, lunch, and dinner.

Okay so like 6 R&B breakfast, we'll have some 6 R&B breakfast we will have some 15 R&B lunches, and then -- so we have the entry price pointing but we want to -- obviously you want to give people -- you want to trade people up as much as you can into the higher quality products.

And that's really what our focus is.

We're really going to quality transaction.

And, Keith, to your follow on question regarding the impact that the new menu could have to our margins, it's early days, but we expect that, as we mentioned before, it will drive some, or put some pressure on food costs and labor, but not to an extent that is going to change our strong outlook for, you know, margin improvement balance of year.

In fact we expect the sales leverage coming from the promotion, combined with the oncoming productivity initiatives to really dominate the margin story for the year.

Pat as far as the mix impact though in terms of same-store sales, it sounds like, especially given that this is premium, aside from the margin impact, it does sound like there could be positive mixed benefits from this.

From an average check perspective?

Exactly.

You know, as we mentioned, we've maintained the strong value offer on the menu as well, so it's not as though we are moving away from value.

I think it's the power of doing both.

Thank you.

Next question, please, Gianna.

Next question comes from Sara Senatore from Sanford Bernstein.

Your line is open.

Thank you very much.

I just wanted to ask a follow-up question about Taco Bell.

It looked like, in the first quarter, you talk about promotional spend and franchising incentives.

Can you talk about kind of whether or not, in light -- whether or not those persist through the year and what -- how successful breakfast needs to be for you to be hit your ongoing growth algorithm.

I know you've talked about $100,000 as kind of the incremental sales layer, but I'm just trying to figure out, this year, what the puts and takes there are on the margin, with respect to breakfast?

And then I also had a quick follow-up question.

Outside of Taco Bell, if I look at the margins for Pizza Hut and KFC, globally recognizing that there are some one times, I think in the past, you said that there's an opportunity there when there is report why or I to get company operated margins maybe a lot higher is that still the case?

Let's deal with the Taco Bell question first, Sara.

With respect to our expectations around breakfast and what we're seeing today, we've been targeting mid- to high-single-digit mix for breakfast.

That's generally what we saw in test and to David's point earlier that was highly incremental.

And that's probably what we're seeing in the early days of the launch of breakfast.

How it is going to impact our margin, so that's the sales piece and so if we achieve and we maintain that mid- to high-single-digit mix for breakfast, that's what we need to deliver our same-store sales growth targets for the year.

In terms of the margin piece, the breakfast offer at that mix level is slightly diluted to margin but only slightly.

For us, this is an opportunity to establish an entirely new day part that is highly incremental that, as it builds over time, is going to be overall accretive to our margins.

And therefore, as David pointed out earlier, will put us in a position to accelerate the pace of new unit development.

Understood.

And then on Pizza Hut and KFC?

Well you know I think the important thing to keep in mind is that, in those businesses, in the US, we have very low levels of company ownership, even internationally.

So franchise development dominates those two brands, particularly in emerging markets.

We do expect, over time, to see those margins improve, particularly as our company store base is increasingly skewed to those emerging markets, which offer the benefit of better restaurant level economics, of lower labor and lower rent.

So, over time, as we pick up the pace of development with company stores in emerging markets, and those form a higher proportion of our total equity store base, we continue to target margins for KFC and for Pizza Hut that will take us into the mid-teen territory.

Thank you, Sara.

Next question, please, Gianna.

Your next question comes from Jason West with Deutsche Bank.

Your line is open.

Thanks, guys.

On the China recovery, in particular at KFC, the 11 comp in the quarter.

Can you talk about kind of how that looked within the two-tier groups that you look at.

Were you seeing similar recovery in tier 1 and 2 versus 3 through 6?

And just overall thoughts on as your -- it looks like your brand score is back to normal but the comps on the two year are still pretty negative.

Just to why the big discrepancy there between the recovery and where the brand scores are?

Thanks.

Yes, certainly, Jason.

On the sales by city tier, there was modest variability in KFC same-store sales growth across the city tiers, with results strongest in tier 1 cities, particularly Shanghai.

Because you'll remember, that's where we experienced that the steepest sales declines in the first quarter of 2013.

So there was a stronger lapping benefit, if you will, in tier 1 cities; Shanghai in particular.

So there was modest variability there.

Not so much on the Pizza Hut side.

And then in terms of the two-year comps, as I mentioned before, I don't know that the comps tell the whole story.

They become difficult to read, based on the variable lap of the two and three year comps, and so forth.

We've looked at those.

But what I really hang my hat on is absolute transaction volumes on a deseasonlized basis.

This is something that we study from month-to-month to really see how we are tracking with our business.

And what we're seeing is continued improvement and upper momentum in that measure.

That's what gives me confidence, along with the consumer metrics, that the business is steadily recovering.

And overall, we're pleased with where we are at and the progress we're making again, not only in sales, but importantly, the profitability of those sales and how they work together to deliver the bounce back in operating profits.

You know our goal this year is to get that high to single to low double-digit same-store sales growth and about 40% operating profit growth in our China Division.

Frankly we don't need heroic same-store sales year in China.

You know high-single to low-double-digit growth is fine.

You know, what we want to do is get our business back on the right footing, get more consumer excitement back, and we prefer to grow on a solid and controlled manner this year and then build off this base.

So we are basically focused on building the business the right way for the long term.

I think we are making continual improvement with KFC, and I think we're basically on track.

Thank you Jason.

Gianna, next question please.

Next question comes from John Glass with Morgan Stanley.

Your line is open.

Hello, this is Jake Barlett on for John.

I have a quick question on COGS.

You levered it more than we would've expected with the pricing in the flat inflation.

Was it just lapping discounting of last year?

And then on those -- along that line going forward, do you expect this kind of a benefit in the quarters going forward or should we just use it as a normal interplay between pricing in our inflation expectations?

Jake, in future quarters we would expect to return to a more normal pattern, so Q1 was unusual, as I mentioned, because we had some pretty extreme discount offers in Q1 of last year in an effort to stimulate transactions, so we're getting a lapping benefit.

So we saw average spend grow from that more than we would expect in a normal quarter.

On top of the fact, as you mentioned, that we have a new pricing actions come into quarter where food inflation was flat.

So it's not about an ongoing theoretical food cost system or some sort of productivity gains here were just efficiency gains you're achieving at the food cost level?

No.

And then in terms of the restage, you mentioned customer experience, is that involving a re-image of sorts?

Could you just remind us?

Well I think we're building off of a powerful image, the number one brand in China.

All we're basically doing is trying to invigorate it and show, demonstrate --

I meant remodels, some sort of remodel program in China.

Okay.

We constantly remodel every 5 to 7 years.

We just have new designs that we will be rolling out this year.

Gianna, next question please.

Your next question comes from Jeffrey Bernstein with Barclays your line is open.

Hi, great, thanks guys.

This is Reuben on for Jeff.

Just really quickly on the China consumers as it relates to confidence and sentiment.

Are you seeing any changes in the consumer willingness to dine out or maybe in their habits in any way?

And also on the broader industry sales versus KFC, do you still see yourself lagging because of the supplier issue or have you kind of regained the lost -- some of the losses and kind of brought yourself more in line with the category and outperforming?

Thanks.

Well, certainly, on a reported basis, given the strong bounce back in Q1 helped by the lap from last year, we're outperforming the category from a quarterly growth perspective.

I would say that the macro situation hasn't changed versus last year.

It continues to grow, overall.

And I think when you look at the fact that we had good -- very solid results with our Pizza Hut Casual Dining business, that's further indication that when you have a concept that is well-positioned and well executed, consumers are going to come.

And so we're delighted with the results that we're getting.

And, as we said, we see the China business to be an important one for us for the long run and, even though 7% growth in GDP is lower than it was in recent years, it remains the fastest-growing large economy in the world and we've got a leading position there.

So were very happy with that.

Thank you.

Gianna, next question, please.

You next question comes from Andy Barricks with Jefferies.

Your line is open.

Hey, guys, just wondering about the food inflation commodity inflation uptick in the US business.

It looked noticeable, obviously, in Taco Bell, which is predominantly domestic.

Can you give us some thoughts around that?

And then your pricing actions for later this year, in terms of the scope of that?

And was that initially anticipated or sort of a reaction to some of this commodity ramp?

Well there is no doubt that commodities have played out very differently from what we thought in New York.

You'll recall, we came into the year expecting 4% inflation in meat and 4% deflation in cheese.

Things could not have played out any differently, as we're now expecting low- to mid-double-digit inflation in beef.

It was up high-single digits in the first quarter.

And then for cheese, we're expecting now mid-single digit inflation.

It was up over 20% in the first quarter.

So it has played out very differently.

And so yes that has played into our pricing actions this year and what we intend to do balance of year.

But this is one of those things where we continue to read the business and terms of how consumers are responding to our value offers and to our new product innovation, and the progress we continue to make on productivity initiatives.

And then we determine what we need to do by way of pricing in order to maintain and improve margin so that we have a strong investable proposition that is going to underwrite future unit growth.

So, yes, the commodity situation in the US is proving to be a challenging one, but we're dealing with it, just as we have for the last 50 years.

Thanks, Andy.

Next question, please, Gianna.

You next question comes from Diane Geissler with CLSA your line is open.

Good morning.

I wanted to ask you about opportunities on re-franchising, just where you stand?

I think there's still some opportunity on the Taco Bell side.

And then, when you look at the China market overall, where do you see yourselves basically 3 to 5 years from now, in terms of do you see more franchising -- a chance to re-franchise there, particularly as the market matures and you get bigger in India for instance?

Or do you still see a company owned operating model in China over the longer term?

The philosophy we've always had is to earn the right to own.

And wherever we owned stores we've earned the right to own them, with the exception in some markets in countries where we own a few stories just so we can lead for test markets.

But if you take a look at Taco Bell, we've actually reduced or ownership in Taco Bell for the past few years and now it's about 15%.

But Taco Bell has margins that ended last year close to 20%.

These are clearly the shareholder benefits by us owning those restaurants.

And so that's the mentality that we have.

We look at all of our equity on a constant basis and make sure that we are -- the investment we're making in terms of running a store exceeds well exceeds our cost of capital.

And specifically to the business you mentioned, Diane, you know, Taco Bell at 15%.

That's our target.

So we're there so it isn't more re-franchising opportunities that we see there and we are generally happy with the returns we're getting on those investments and we believe it's a strong equity position for us.

And then, as far as China is concerned, we have been doing some modest amounts of re-franchising for the last several years.

We see that continuing.

So we expect that we'll continue to maintain that ownership percentage.

To David's point, though, under the banner of earning the right to own, given extraordinary returns we're seeing on new unit development with both KFC and Pizza Hut and coming up now, Pizza Hut Home Service, we think it's a great place to own and operate restaurants.

It creates enormous value for our shareholders.

We see China being predominantly equity for many years to come, although we are looking very aggressively at franchising as a way to accelerate even more growth as we go forward.

Thank you.

Next question, please, Gianna.

Next question comes from RJ Hottovy with Morningstar.

Your line is open.

Yes, thanks.

I just wanted to drill down a little bit more into the takeaways from the global branch strategic reviews.

More specifically discussing KFC and your ability to take the learnings from the successful developed markets like the UK and Australia and apply them to North America.

One what type of initiatives do you have planned?

And, two, how do you plan to communicate those to the franchisees?

Thanks.

Well I think what we've -- when you look at the UK business and the Australia business, KFC in particular, you know you've got two very successful businesses that are more in the portable food arena, particularly with sandwiches.

So we're looking at how we can take some of those learnings and develop a right sandwich platform and be effective in the United States and that arena, as well.

You know I think we constantly share product news that travels.

So any new product that is developed in Australia or the UK, we'll move it to the US.

One of the things, for example, is boxed meals were very successful in Australia and we've moved them into the US trying to target a $5 price point.

I think when we were organized separately, the US teams didn't really work as closely with the international teams as we'd like and we're going to see a lot more sharing and, I think, adoption with those teams together now reporting into or focused CEOs.

Thanks RJ we have one final question, Gianna.

Last question comes from Peter Sela with Kelsey Advisory Group.

Great, thank you.

I just wanted to come back to Taco Bell breakfast.

I think you'd mentioned $100,000 incremental layer from breakfast.

Just curious, in test, how long did that take for the franchisees to kind of get to that breakeven level?

As you know, we've been developing our breakfast layer for a number of years, evolving the menu to understand what is going to resonate most with consumers and be perceived as a highly differentiated offering.

So you know we've made a number of changes to the menu over that period of time and it's been with this most recent offering that it's been an active development in tests in the last 18 to 24 months that we've seen the best results that it is now given us the confidence to go national.

So, as we mentioned, it was in this test that we achieved the mid to high single-digit mix that we needed, in order to make the economics work for us.

And we're very pleased and encouraged by the early results that we're seeing from the program, which are generally in line with what we saw in test.

Great, thank you very much.

Okay let me just wrap it up by saying that we are confident we're going to have a strong bounce back here in 2014.

We're going to grow earnings-per-share abate least 20%.

And we look forward to reestablishing our track record of consistently delivering double-digit EPS growth in the years ahead.

As we go into the balance of the year, we have significant building blocks in place in China in each of our divisions that we think will help us have a very solid year.

Thanks you very much

Thanks everyone for joining the call.

This concludes today's conference call.

You may now disconnect.

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