Yum! Brands, Inc. (YUM) Q1 2012 Earnings Report, Transcript and Summary

Tim Jerzyk - Senior Vice President of Investor Relations and Treasurer David C. Novak - Executive Chairman, Chief Executive Officer, President and Chairman of Executive/Finance Committee Richard T. Carucci - Chief Financial Officer

John W. Ivankoe - JP Morgan Chase & Co, Research Division David Palmer - UBS Investment Bank, Research Division Michael Kelter - Goldman Sachs Group Inc., Research Division Brian J. Bittner - Oppenheimer & Co. Inc., Research Division Jonathan R. Komp - Robert W. Baird & Co. Incorporated, Research Division Howard W. Penney - Hedgeye Risk Management LLC John S. Glass - Morgan Stanley, Research Division Jason West - Deutsche Bank AG, Research Division Unknown Analyst Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division Jeffrey Andrew Bernstein - Barclays Capital, Research Division Gregory R. Badishkanian - Citigroup Inc, Research Division Keith Siegner - Crédit Suisse AG, Research Division Joseph T. Buckley - BofA Merrill Lynch, Research Division Mitchell J. Speiser - The Buckingham Research Group Incorporated Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Good morning, my name is Rashay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands First Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Jerzyk, Senior Vice President of Investor Relations, you may begin your conference.

Thank you, Rashay. Good morning, everyone, and thanks for joining us on the call this morning. The call is being recorded and will be available for playback. We are broadcasting the conference call via our website at yum.com. 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. I would also 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 earning release last night and the risk factors included in our filings with the SEC. In addition, please refer to the Investors section of the Yum! Brands website to find disclosures and reconciliations of non-GAAP financial measures that will be used on today's call. Also, we would like you to please be aware of few 2012 Yum! investor events. The next earnings release will be Wednesday, July 18, that will be second quarter earnings when we will release. August 22, we will host a YRI investor conference in Plano, Texas. We would love to have you. And then the big event is on September 12 and 13, we will host an investor conference in China. We will be going to Xi'an this year, one of the 4 ancient capitals of China, a 2-hour flight west of Shanghai. This will be followed by an event in Vietnam on that 2 days later on September 15. We have a great event for you in September in China and in Vietnam. Finally, our investor update meeting will take place on December 6 in New York City. On our call today, we will hear from David Novak, Chairman and CEO; and Rick Carucci, our CFO. Following remarks from both, we will take your questions. Now I'll turn the call over to David Novak.

Thank you, Tim. And good morning, everyone. I'm pleased to report each of our divisions produced impressive sales and proper results driving 21% first quarter EPS growth excluding special items. This performance leads us to raise our full year EPS growth forecast to at least 12% from our initial guidance of at least 10%. Our international business is clearly the growth engine that drives our company and comprises over 70% of our operating profit. Importantly, over 55% of our operating profit comes from high growth emerging markets. Yum!'s strongest businesses are located where the highest growth is expected to occur in the years ahead. This is a very powerful combination. We also continue to be optimistic about our ability to dramatically improve our U.S. brand positions, consistency and returns. While there is still much work to do, we expect significant progress with our U.S. business this year. Now let me take you through our key strategies. Let's start with China, where our strategy is to build leading brands in every significant category. Operating profit in China grew 14% prior to foreign currency translation. System sales increased 28%, driven by a 17% increase in units and same-store sales growth of 14%. These fantastic results give us even more confidence our category-leading brands are as strong as ever and well positioned for sustained profitable growth ahead. KFC now has 3,819 restaurants, with averaging volumes of $1.7 million in 800 cities throughout the country and continues to expand into new cities, as well as increase its penetration levels in existing markets. KFC is deeply rooted in China with its localized menu and broad appeal. Virtually all KFCs in China serves breakfast, which accounts for about 6% of sales. Nearly half our KFC restaurants offer delivery service and over half have 24-hour operations. These…

Thank you, David. And good morning, everyone. Today, I'm going to cover 3 topics: our first quarter results; some items to consider as we look into the balance of 2012; and a brief update on Little Sheep. We simply had an outstanding first quarter. Each division delivered strong sales and profit growth, driving 21% EPS growth, excluding special items. In China, system sales grew 28% driven by impressive new unit development of 17% and same-store sales growth of 14%. Operating profit grew 14% excluding foreign currency translation. Operating profit included $6 million of non-recurring expense in the first quarter related to the acquisition of Little Sheep. Offsetting this, our results were enhanced by the additional day from leap year, which provided about $5 million of incremental operating profit. As we look deeper into our China results, please keep in mind that our first quarter in China is only 2 months long and is heavily impacted by the Chinese New Year. There are several business features associated with the Chinese New Year. First, sales are typically strong around the holiday period. At the same time, consumers are usually a bit less price-sensitive than at other times of the year. And not surprisingly, landlords and retailers pushed to open stores before the holiday period. Restaurant margins in China were a very healthy 23.6% but down 1.5 points versus prior year. These margins were slightly better than our expectations given the high commodity and labor inflation in the quarter. Margins benefited somewhat from the Chinese New Year as the mix of value menu items was below the levels we saw in the preceding months. China development set a new first quarter record with 168 new units. Due to the early timing of the Chinese New Year, over 150 of these units were opened…

Okay, thank you very much, Rick and Tim. And what we'll do now is we'll open it up for any questions that you have on our business.

[Operator Instructions] Your first question comes from the line of John Ivankoe. John W. Ivankoe - JP Morgan Chase & Co, Research Division: So many questions. First, on China. I mean, given your current success of getting units open, I mean, well above, I guess, the plan that was set the year ago. I mean, what is the gating or the mitigating factor that would prevent that unit growth from going up? Availability of real estate? Is it RGM capability of your development team? If you could just talk about what kind of capacity that you have in the system in terms of opening these units, especially as we begin to consider out-year expectations for unit growth in the division?

Let me just start with historically what we've said and what's occurred and then I'll get to what we expect in the future. Historically in China, it's really had to do with economic development and development of trade zones. And again, as we've looked at historic unit counts, they sort of plateaued for a few years, then they sort of jumped up and they plateau and then they've jumped up. It hasn't been a smooth, continuous increase. One of the jump-up years was 2011. And as we sort of said in the December meeting, that's really based largely on the China government 5-year plan and developing the city clusters. And then the other thing that would allow us to raise our number was the success of Pizza Hut Dine-In business. So those 2 factors really let us go from a run rate of 500 to about 650 in 2011. This year we said -- I just said we'd opened at least 600 units. We're obviously off to a great start. So our confidence level is quite high that we'll reach that at least 600-unit target. And it's really hard to predict when those numbers plateau and when they jump, John. I've been at this for a while, and even the China team is -- we have a hard time calling it in advance. What we have said is that our absolute numbers would grow even if our percentage goes down in terms of new units as a percentage of total. Interestingly, the January number was our highest percentage new unit openings in 3 years. So we obviously feel very good about our prospects. So the combination of the economic development plan, the factors that David talked about in his speech, the middle-class continuing to grow, people moving from the country to the cities, all those factors continue to make us very bullish that those numbers will sort of, I'd say, at least stay the same for a period of time, and, hopefully, at some point in the future, we'll have another bump up.

Yes, the only thing I would add to that, John, in terms of long term and our ability to execute, which is always -- is the key, is that when you look at both operations and our development functions, we've got, I think, unparalleled capability not only in China, but I would say of any retailer in the world. When you look at operations, we have a highly educated RGM core. 90% of our restaurant general managers have at least a college education. Over 50% of our team members are students. We have 2 assistant managers in every restaurant ready to become RGMs. And we have over 3,800 KFCs now. We have over 600 Pizza Huts. So that's why we're able to open up all these stores so successfully. We're opening it up with very well-trained RGMs and well-trained teams. And in fact, our operating team in China looks at every store as a training store. So we're constantly developing the talent that can open up these restaurants successfully. Here's an interesting factoid, we've really started what we call a Whampoa Academy, which is our analog for a famous military academy in China where we're developing the -- what we think is the retail talent for China in this next century. We'd basically say the restaurant general managers or kids coming out of school that in 4 years, you can become an RGM, you can become a franchisee potentially for us or you can go work in another retailer and be totally well-trained. Well, in this past year, we hired 10,000 management trainees in 2011. That's going to increase to 15,000 in 2012. So we're really readying for the new store growth that's going to occur. Now I think on the development side, again, we got 1,000 -- Rick said…

First of all, I think that the China team arguably has done the best job of any retailer in the world. So the good news is, is that I think with Sam Su and the team we have there, we haven't left a whole lot on the table. I think what we've really embraced more fully in the last couple of years, which is, I think, unlocking a lot of transaction growth, same-store sales growth and building our base as we go into the future is that it is an everyday value proposition, making our brand more and more affordable for our customers. And we've always had great affordability, we even -- we're even more so now, and I think that's a huge advantage when you think about us being in the embryonic stages of building categories and building brands. I mean, if you look at McDonald's great success that they had originally, they broke the code when they had $0.15 hamburger. We all had those when we were kids. We're making our brands now as affordable as they can possibly be in China and we're doing it at great margin. It's -- we're building a great brand, building great trial, building the brand the right way. And I think that the good news that we have in India, Vietnam, Indonesia, Brazil, all these places is we now have what we call our emerging market group. They're going to China. In fact, they're going to be in China on June 6, and they're going to be there to really look at the China operating model and take that same model and apply it into those markets. And I know some of you may have had the opportunity to go to India. One of the things and reasons why India is doing so well now with KFC is that Niren Chaudhary and the team there, they spent a ton of time with Sam Su and his team. And I think they're doing a lot of the things that we did in China, great sites, operating capability, all of that is being adapted in India. And I think that China is now beginning to pick up a few things from India as well. So I think it's a great advantage that we have, that we can go to China and have such a stalwart example of how to really execute.

Just to add to that, John, I agree with David. I think when you're looking at a new country, the combination of brand building and unit economics is key. And fortunately, we have both those in India. I think the brand that we're building is KFC brands looking very strong, and we have the unit economics that we've talked about that are strong across the country. I think 2 specific other learnings that they took from China besides the things David talked about, one is that we're going to more cities earlier. I think that traditionally, when open up countries, we concentrate a lot in the capital cities and the biggest cities. And what we learned in China is that there's opportunities in -- when you have 1 billion people in a country, there's opportunities in a lot of cities. So in India, we're going to cities -- outside the major cities quite quickly. And the other thing is the quality of the people. I mean, and that was really from day one in India. But I know you just got back from there, the quality of the people that we have in India, not just at the management level, but the store level, is exceptional. And I know you always get a lot of confidence when you know the consumer is getting a great experience and then you have management that's as talented as we have there.

And your next question comes from the line of David Palmer with UBS.

Rick, you mentioned the first quarter is only 2 months long in China and then 2 weeks of the Chinese New Year being particularly important within that. And I think one of the implications of that is that this quarter is a far from perfect indicator of your business momentum there for good or ill. You have the benefit of seeing 4.5 months of 2012 so far, being able to see through the impact of changing promotions, value menus and whatnot. How would you characterize same-store sales momentum in China from where you sit, and what sort of range of same-store sales growth should we be thinking about for China in this year, 2012?

Yes, as I said coming into the year, I think it's really hard to forecast same-store sales in the year 2012 coming off a year like 2011, which was so strong from a same-store sales perspective. On the positive end, you have momentum. On the negative side, you know you're going to be lapping some big numbers, especially as we get into the second half of the year. And we're not going to give a forecast for the second quarter. What I would say is traditionally, we'd let people know if there's a significant bending in the trend. And we're not sort of saying that there's a huge change in the trend versus what we saw in the first quarter. So we're obviously off to a very good start. I just want to also just keep framing for people that these same-store sales numbers were on top of just huge development numbers in the back, in the fourth quarter of '11 and the first quarter of '12. And I know we're used to sort of saying what are same-store sales, et cetera, but we look at system sales a lot and we've got 2 quarters of just unbelievably strong system sales. So while we obviously care about same-store sales, as David mentioned, we're even more concerned or more encouraged by the development that continues to occur in China. And my expectation is, as I sort of said in the speech, at some point, I expect same-store sales to -- growth to slow down, but I don't know when that will be.

Yes, we really can't predict that. The only thing I think I would just build on this is that we're building a model in China that can incorporate a whole lot more average unit volume growth, okay? Our breakfast daypart is 6% of our business today. It's now national. But it's 6% of our business, okay? We have delivery, home delivery, business delivery, in half of our stores, and we have 24-hour service in half of our stores, all right? Embryonic stages. Value is something that we are doing now with our 6-1 breakfast, 12-1 lunches. So that's all geared towards making our product more affordable to this consuming class that's going to double in the next -- to 600 million people in the next 8 years. And then we're also continuing to innovate with rice and chicken-based dishes that are new and exciting and make us even more locally relevant. So the team is very set on leveraging that asset 24/7, okay? And as we do that, we're at the embryonic phases of those dayparts and new segments. So I don't know when same-store sales growth is going to slow down. I can't predict that any better than Rick, okay? But what I do know is that the new unit opportunity we have is beyond even comprehension, okay? And then the same-store sales growth opportunity is clearly there as we leverage our asset. But our model needs, as we go forward, we want to continue setting records in new unit development, and we need 5% -- about 5% to 6% same-store sales growth. We think that, that's achievable from a long-term model perspective.

And your next question comes from the line of Michael Kelter from Goldman Sachs.

Further on China and what's going on over there. The macro is clearly slowing a bit. And you see it in housing, in PMI under 50, in durable goods and things like that. How is it filtering to your business, whether -- I don't mean necessarily just what's the comp look like, but what about behaviors in the restaurants? What are consumers doing differently, if anything? Are you seeing it differently in Tier 1 or 2 versus 3 to 6 cities? Are you seeing it in different dayparts or menu ordering? Kind of what's going on in the restaurants for you over there?

Well, clearly, given the results we have, we're not seeing much in the restaurants, right? So we had both really strong transaction growth, that 14% growth. I think it was 9% transactions and about 5% tickets. So we had nice balance there. We have not seen a change in attitude. As it's hard to read the macros in China. As we sort of said before, the housing -- they have a housing bubble in China. That is a real concern for people because they are worried about can they afford their house down the road. Some of the other GDP stuff doesn't bother us as much, and we've looked at that stuff. But one of the things that the Chinese government has tried to do is to become more dependent on consumption and make that a bigger part of their economy. It looks like they're being successful in that a higher percentage of the growth this quarter was consumption than past quarters. Confidence of the people had been stagnant for a while. That's actually picking up a little bit. So I'd say that the macro should -- I'd say, for us, the short-term macro stuff is mixed, but probably as much positives as negatives. And as David said in his speech, the long-term macros are still great for us, and that's in terms of being able to add units for a long period of time. So overall, we're actually comfortable with how the China economies performed.

My only point is that when I read all these macro trends and I know that they're out there, and we're on top of them just like everybody else is, I haven't read anything anywhere, from any expert, that says the consuming class is shrinking, okay? And when people are talking about these macro trends, I'm not seeing the same people write about how the growing middle class is going to go from 300 million to 600 million people. This comes from outside sources, that's not Yum! Brands estimate. So I think when you're thinking macro, the overwhelming, the overwhelming macro trend that should affect consumer businesses in China is the fact that there's more consumers, okay? I mean, that's a pretty overwhelming trend. So Michael, I know you got a good consumer goods background, you might want to consider that one.

Yes, Michael, I would just add one thing. There's -- everyone sees the macros from all their economists and whoever they want to source from, but the one thing that I started to look at a little bit more frequently is the performance of our Pizza Hut Casual Dining business, which as you know, has a much higher guest check. And I think that's showing some really amazing things. Obviously, we've done some great things with the concept several years ago, and the brand is a leader by far and the consumer has responded to that. But in Q1, with 19% same-store sales growth, it lapped the 13, which lapped the 13-year before that. So we're talking about 45 points of comp growth over the last 3 years. And the last quarter was the most -- was the strongest. I think that is also somewhat of an indicator of the strength of the consumer in China.

And the increase in the consuming classes is undoubtedly helping you guys, the -- one of the other side of that is the labor inflation side. I just wanted to understand that a little better, especially in light of what will presumably be moderating same-store sales in the future. It's been about -- labor inflation has been about a 200 basis point headwind for your for the last couple of quarters. Might that step up if comps come down to, let's call it, mid or high-single digits in a more normalized environment? Or is there any reason why you might be able to manage that down despite the lower leverage level?

Well, as we've sort of said before, we sort of see labor inflation as continuing for quite a period of time. And we sort of said when they set up their new 5-year economic plan, we expect that in the mid-teen level. And we just think that's probably going to occur for a period of time. It's actually come down a bit from the high points that we had in the back end of last year. So we think that's a normal occurrence. As we sort of said before, it's a dual-edged sword. We'll get the higher cost that we have to manage. We'll have to pass some of that forward in the form of pricing to consumers. But the consumers have more money to be able to afford our products. And that contributes to the growing middle class that David talked about. So if we look at that, it's just sort of a thing that's going to continue for us. We think it's going to continue for our competitors and everyone else. So we just look at that as sort of part of the background.

Your next question comes from the line of Brian Bittner with Oppenheimer. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: Understanding that you have a lot of interesting drivers to grow the AUVs across all your units in China, I'm still trying to better understand the comp performance of new units versus maybe more mature units. Are new units rolling into the base at much higher comp rates in the existing base as you build the brand beyond Tier 1 and Tier 2 cities, or are you generating these similar double-digit comp trends in stores that have been around for a while given this positive consumer backdrop and your own company-specific initiatives that you continue to implement?

Yes, it's not that easy to figure out, actually. First of all, just for background, again, for some others, our new unit volumes are generally 250,000 to 300,000 below our average unit volumes. And that's been going on for years in China. Now in terms of the rate of growth, on average, our new unit volumes are probably going a bit higher because they have been in the smaller-tier cities and in the central and west, which has been sort of outgrowing the rest of the country. But it's very hard to isolate units because we continue to cannibalize ourselves with new units on top of new units. So in the old days, you could sort of figure that out. Now it's actually extremely complex to figure out. So I think the way I think about it is think about those growth as similar, and that the margins are the same as the existing base. But they're smaller on average unit volumes as you go to, one, smaller-tier cities; and the second, more infill units. Brian J. Bittner - Oppenheimer & Co. Inc., Research Division: Okay. And then one more quick one. As far as Pizza Hut in China, trends appear to be accelerating there, definitely saw that in this quarter. I was wondering if you could touch on anything outside of the positive macro backdrop that's maybe taking place at the brand there at Pizza Hut.

Well, I think the big thing we have there that we've talked about in the past is we're changing out the menu every 6 months, 25% of the menu. We've got the value proposition there: Eat like a rich man, eat like a poor man. We have daily half-off specials on entrées, which I think is quite successful. We're leveraging the asset. Our afternoon tea time continues to grow. We've brought in new proteins. We're actually selling steak now with the new pan technology, with the display cooking, and that product is doing well. So I think the team is really fully embracing the fact that we want to be the casual dining chain in China with multiple proteins and daypart leverage. So we have afternoon tea time. We will be testing other opportunities to leverage the asset throughout the day as well. So a lot of good news happening there.

And your next question comes from the line of Jonathan Komp with Robert W. Baird. Jonathan R. Komp - Robert W. Baird & Co. Incorporated, Research Division: I just want to get a better sense of how you think the U.S. profit performance could play out in the balance of the year. And, obviously, a strong profit growth in the quarter you just reported. If I look to the -- the balance of the year and the comparisons for the next 3 quarters, on a combined basis, really looked somewhat similar to what you just cycled in Q1 when you had -- account for the extra week. So my question is, was there anything unique from a profit perspective in Q1? And then as you look to the balance of the year, are you thinking similar type growth of -- similar type rates of profit growth are possible, or how are you thinking about that?

Well, let me repeat a couple of things that I put in my speech just to try to look at what could happen in different quarters. I think first of all, on the second quarter, we mentioned that Taco Bell sales strengthened from the first quarter. So -- now with Taco Bell being a big driver of our U.S. business, we'd expect a pretty strong second quarter in the U.S. And then in the fourth quarter, we have the headwinds from the 53rd week, which was not insignificant. It's $18 million headwind in the fourth quarter. So that will skew what happens from a quarter-by-quarter basis. Obviously, you can't expect to grow 27% every quarter from an operating profit standpoint, but we're pretty bullish on the full year for the U.S. at this point.

And your next question comes from the line of Howard Penney with the Hedgeye Risk Management.

Actually, 2 questions. In the second half, you talked about a 2% improvement in margins in China. What's the same-store sales assumption that you have with that improvement in margins?

Yes, we don't have a specific same-store sales assumption. The biggest impact we sort of said, we expect sales to moderate. But the impact is really -- inflation was very, very high in the third and fourth quarters last year. We got behind from our pricing standpoint. We think this stage pricing will start to have an impact in the second half of the year, plus we expect inflation to moderate in the balance of the year. Again, to put things on perspective on the inflation side, on the commodity side in particular, we said going into the year, we expected 6%. We had 10% in the first quarter. If anything, we're gaining more confidence that 6% is the high end of what we expect from commodity inflation. So we have that benefit plus the cumulative pricing coming in that should help the margin in the second half.

But you do have an assumption for same-store sales for the back half, correct?

Okay, we just said less than what they were so far, but nothing we're going to share at this point.

And then another company, consumer company, mentioned that volumes were soft in China because of the cold weather during the Chinese New Year. Would you agree with that statement, or did the weather impact your margins in China during the new year?

Yes, we are rarely weather forecasters, or talk about the weather unless it was extreme. And so we didn't think it was worth calling out.

And your next question comes from the line John Glass with Morgan Stanley.

One on China comps, and then I promise, one that's somewhere else in the world. But on the China comps, can you talk about the composition of them? In other words, as you cycle the value platform last year, are you seeing incidences off -- ordered off of that volume menu declining, stabilizing? Can you talk about the impact of the non-traditional food at KFC, i.e. the more Chinese-centric food, can you talk about the role that's playing in comp store sales, some way to understand maybe how those 2 elements in particular have played out, and maybe how you think about them for the balance of the year?

Yes, I don't have a great breakdown of the second part of your question in terms of the Chinese food yet. We'll obviously learn more as we get more time into the year. We're obviously very pleased that we have the variety. And we think that's one of the competitive advantages we have in China. So we love the fact that we have the food innovation, but I can't sort of speak to the specific impact that, that's having. Regarding the first part of your question on mix, again, in the fourth quarter -- well, just for background again, we introduced value in sort of towards the end of the first quarter last year and then more heavily in the third quarter last year. That's when you had the biggest shifts. We sort of said at the end of last year, we were sort of low double-digit as a percentage of people offering -- ordering off the value options. That percentage went down fairly significantly around Chinese New Year. Again, as we sort of said, people are less price sensitive. Early indications is it's going back about to the low double-digit range, which is sort of in line with our expectations. But we still have to see how that plays out.

Okay, that's great. That's very helpful. And then on the Pizza Hut U.K. sale, you talked about in the notes that you got some bids on the business, and that's what created this revaluation or the charge you took. So is the expectation that you'll sell all of it this year, based on those bids, some of it this year? And then could you just remind us again the size of the business? I know you gave us the margin impact, but what's the absolute dollar size of both revenues and maybe operating profit contribution of that business?

It's not a big operating profit contribution. As we sort of said is when we refranchise, we'll make as much money as we're making today. So it won't be -- it will probably be flat or accretive on the profit standpoint. It's about, I think, 400-something restaurants, 450, in that range. So roughly $0.5 billion of revenue would be the size of it. In terms of expectations, we expect to sell the entire Dine-In business this year. And so we're going through the process now. So we'll see how that plays out. But that's our goal this year, is to complete the sale during 2012.

And your next question comes from the line of John West from Deutsche Bank.

It's actually Jason. Just 2 fairly quick ones. One, could you clarify, Rick, on the guidance on U.S. margins, you said about 2 points of improvement this year. Was that for restaurant margin or EBIT margin?

Restaurant margin.

Okay. And then just secondly, going back to India, just the discussion there on sort of the similarities and differences versus your China expansion. I know in China, one of the important competitive advantages you guys have was owning the distribution model, which allowed you to get into the smaller cities a little earlier than others. Can you talk about in India, how you distribute products, is it similar to what you did in China, or is it more traditional kind of third-party partners?

We used third-party partners. Distribution is a challenge in India, so it is something that because of the infrastructure they're not as developed as China was at the same stage of development, it is harder to get product around. Well, that's really just the function of the roads and the infrastructure, not the quality, we believe, of the distributors. So we do use third-party distributors. China is really the only country in the world where we own our own distribution system. We didn't think that was necessary in India.

And your next question comes from the line Deepa Mochene [ph] with UBS.

I have a few questions on Yum! India. Basically, the 8% SSD growth, what will be from transactions and what would be from the ticket group?

I don't know that, Deepa [ph].

Yes, we can -- we don't have it handy. I can certainly get back to you, if you call me after the call, or e-mail me, I'll get you that information.

Okay, sure. Do you have any idea of what the price increases you have taken in the first quarter in Indian market?

No, same thing. Same -- I would say the same thing. Just give me a call or e-mail me after the call, and I will get you that information.

Okay, sure. And another question on the same-store sales growth. Is this 8% growth exceeding your expectations, or is it below your expectations?

Yes, this sounds flippant, and I don't mean it be. As we're in this stage of where we are in India, what we care about is really healthy unit economics, healthy brand and new unit penetration. So we want to make sure that there's not a problem with same-store sales, but that's why we couldn't answer some of your questions, is that we're not as focused in on it at this stage of where we are with development. Honestly, we're happy with -- anything positive at this stage is good.

Okay, sure. And just to follow-up on the same thing actually. The 8% same-store sales growth, I think majority of it would be coming from your KFC business rather than the Pizza Hut business. You can correct me if I'm wrong, but SSD for the Pizza Hut business would be much more lower than the 8%?

No, it actually was pretty balanced. I don't know exactly from a first quarter perspective, but the trend across the 3 brands have been solidly positive, that's KFC, Pizza Hut Casual Dining and Pizza Hut Home Service. They've all been running solidly positive same-store sales growth.

Okay, sure. And what has been the industry of same-store sales growth, if you have any idea, or QSR in the first quarter?

No, we don't. Same thing, I can get you that information. Just send me an e-mail at tim.jerzyk@yum.com.

And your next question comes from the line of Sara Minotaur (sic) [Senatore] from Sanford Bernstein. Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: It's Sara Senatore. I like the last Minotaur though. So, actually, so, one obligatory question on China, and then I wanted to move to a different region. So China, just go back to the line items in the margins. The questions are, one, occupancy costs, again, like those seem to be rising pretty fast and yet even though a lot of your growth is coming in lower cost cities. So just trying to understand that, if that's like sort of an inflationary index that's attached to your rent rate? And the other piece there, is there any part of the labor cost that is a function of how fast you're growing units, like staffing up or redundancy?

Yes, I mean, obviously, there's something there. We've always been increasing units at a pretty high rate though. So the extra unit impact probably had some impact in the first quarter, but nothing we could really measure. We felt it a little bit in the back half of 2011 as well. But I don't have an exact figure to be able to give you on that, Sara. Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then the occupancy question?

Yes, I'm just looking at the numbers now. Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division: Okay. So then while as you're looking, if I could ask about Western Europe. I know you mentioned it was mixed. Is that Germany and France where you're growing so aggressively, or are you talking about other markets? And then is it safe to say that's because of the macro environment?

Yes, it includes France and Germany where overall, our results have been pretty good, but you do see, I will use the word choppiness. You'll see some weeks up, some weeks down. That's always a little bit of a troubling sign for us, and more recently that we've seen some weakness there. So the trends in Continental Europe from the same-store sales play have been more negative than positive the last -- over the last month or so. So that's what we're really calling out. Again, for our business there, we still care about the profitable new unit expansion, but it is something that we're keeping an eye on. And on the occupancy side, I have nothing that sort of jumps off the table at us. In general, on occupancy, we are facing -- as a percentage, it didn't really go up. So we felt okay about that. In general, as we renew leases in the top tier cities, we are seeing increases that -- in the occupancy there. But we are getting better mix in terms of more and more of our new units are coming into the lower-tiered cities which is helping go the other direction. This is why the percentage is staying, roughly the same.

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

Just a couple of questions, one is a follow-up on that last one specific to the China margin and the components. I know you mentioned you're still talking about 20% roughly for the full year. We were obviously very impressed by the fact that food costs were down in the first quarter 20 bps despite the 10% inflation. Yet on the labor side, it was up 190 bps on what was, I believe, 17% inflation. So I'm just wondering if you could talk about perhaps the mix changes related to the value menu, or whether there were other initiatives that may have helped the food line and whether you think that kind of even flat or modest leverage is sustainable? I know you talked about kind of a new pricing structure, but if there's any color on that or perhaps what your best guess would be with this strategy in terms of pricing for the rest of the year? And then I have a follow-up.

Yes. Well, regarding the first quarter, it's exactly what you said, Jeffrey. It was the mix of the value menu was significantly lower in the Chinese New Year period than it was in the months that preceded it. So that's really what allowed us to have the phenomenon you talked about. Going forward, we're not going to have that benefit, but on the flipside, we expect to see lower commodity inflation. So we'll get results that may be not that far away from that, especially as also the pricing comes into play, to your point. So my guess is that the commodity, as a percentage of sales, when you take those into account, it will be modest changes versus 2011.

Okay. In terms of best guess on the pricing front with this kind of new tool, is there any -- at this point in time, based on inflation perhaps easing a little bit and labor you said easing relative to the back half of last year, kind of what you'd think about pricing?

Well, and I just -- we think we'll -- because if you just sort of do the math, you'd figure roughly similar margins this year as last year when you add it all up, you need a couple of points of pricing to make that work if you look at the overlap from last year. So -- and we're not going to give exactly what we're going to do from a pricing standpoint for competitive reasons, but our strategy has been to lag inflation but then eventually cover most of it. So that's sort of the approach we're taking. And I think this is just sort of a different way of meeting that objective in terms of what we think is just the smarter tactic of doing it.

Understood. And then, Rick, just separately, as you think about kind of longer-term, obviously you got every year to the 10% annual EPS. And I know you talked at your last Analyst Day with your internal models a few points more than that, and obviously you've achieved very consistent growth, what I believe is in the low teens, for the past decade. So I think you mentioned at the analyst day that you'd be surprised if you didn't achieve at least 10% for the next decade, which is obviously a very bullish call on the long-term growth. But I'm just wondering, as you think about the mix components of it, would you think that, that growth rate would inch higher, I would assume with China being a larger percentage of the mix and growing faster, or would you highlight any, perhaps, offsets to limit such an acceleration, whether it be an increase in your investment or other reasons why as the mix shifts to the higher-growth markets that the earnings flow through would similarly shift to the higher teens relative to what you've been running considering the growth trajectory?

Well, clearly, the mix is a benefit, and that's one thing we've been highlighting for quite a while to your point, Jeffrey. The one mitigating piece I touched briefly in my speech is, we've gotten -- if you add up ForEx tax repurchases, et cetera, we've had pretty large impacts in certain years on those combined. And as you look forward versus if you looked at the average over the last 10 years, I'd expect the impacts of those to be less. So we sort of said going forward in our model, and we even gave a model for 2020, we expect a couple of points from financial strategies going forward. Whereas in the past, they've averaged higher than that.

Okay. But other than that, it wouldn't seem like there will be any impediment, or you wouldn't have any issue with letting more flow through if the mix moves the way we're expecting?

Yes, we're not holding back from our shareholders, Jeffrey, so if it flows, it flows. But our model has been pretty -- it's surprising when you think about how much we've changed. But our model has been pretty consistent as we've looked at it because the mix changes have offset what we talked about on the financial side. And so therefore, our operating profit growth is generally higher than it was before. And we expect that to probably continue. But the EPS impact has been about the same when you add it all up.

And your next question comes from the line of Greg Badishkanian from Citigroup.

Great. Two quick ones. First, what do you think the weather impact was in the U.S.? And then also, obviously, the Dorito Taco Locos had really good momentum. And just based on some of the test markets that they've been in, how long would you expect that momentum to continue, you think through the rest of the year and into next year? What do you think about that?

Yes, I think it's a hard one to call, I mean, the good news is, from our standpoint, that the launch went even better than the test market when -- and I think part of that is the team did a really good job on the social media side. And if anything, we've brought forward consumer, so it's hard to say, therefore, what the lasting impact of that will be. I think -- so I'll let David comment some more. On the weather side, and this is almost a religious thing with us, unless it's extreme, we don't talk about it internally or externally. What I would say is that the industry was pretty strong in the first quarter and that some of that may have been weather related, and some of that could just be the economy was looking better overall. So the industry did improve in the first quarter versus what it was in the quarter before that. So that could be an indication.

I think that Taco Bell has been focused very much on sustainable growth plan for the future. I think as we look at Taco Bell, we take a lot of heart in the fact that our operating capability continues to get better and better. We score in the top tier in our industry on speed of service and accuracy. So that foundation is there and improving. Marketing concept, brand building, we just launched a new advertising campaign to really capture the charismatic appeal we have with the youth target audience with the Live Mas campaign which has been very well-received, very well tested. We think, well, that will get better and better as we go forward. From a product perspective, when we look at the core, this reinvention of the taco with the Frito-Lay, we think we're at the beginning stages with nacho cheese as the first flavor. Obviously, Taco Bell -- I mean, or nacho Doritos has a number of other flavors, we think we can generate innovation on the taco platform. Which frankly, we really hadn't had for 50 years. I mean the taco has been basically the same the last 50 years until we just made this innovation. So now, on our core product, we have a platform that is proprietary and one that we can innovate off of into the future. So that's exciting. The other thing we're doing is we're focused on broadening out the appeal of the brand. We're currently testing Cantina Bell, which is a line of products that was developed by Lorena Garcia. We think this is going to extend the breadth of the appeal of the brand, make us more mainstream with both male and female target audiences. So we think that's very important. And then we're leveraging the asset with breakfast. We're in 800 stores in the West Coast. We're going to add 200 more stores in the second half of the year. We expect breakfast to grow. So that literally -- those are significant platforms that we're working on to grow our business on a sustainable basis. Our goal internally, and I talked a little bit about this, is to add that extra $150,000, $200,000 of sales to Taco Bell and get to 8,000 stores. We think we can be a significant new unit developer in the United States as we improve our unit economics. So that's the goal. This year, we obviously have a lot of ammo that we're firing, and we expect to have an excellent year this year. The real key for us is to build off these platforms that we're developing so we get sustainable growth into the future and get to that -- where we can really get the new unit pipeline going again.

And your next question come from the line of Keith Siegner with Crédit Suisse. Keith Siegner - Crédit Suisse AG, Research Division: Rick, I have a question about the U.S. margins, I mean clearly, this is good number. And I know you said it was largely driven by the same-store sales growth. But thinking about the refranchising and the fact that some of these Taco Bells have not been up to system average, like if you could quantify a little bit more for us maybe what the benefit was from refranchising on the margins year-over-year in this quarter? And then it's really helpful to hear kind of the fully adjusted numbers for YRI, ex U.K. If you were to try to give us something similar for the U.S., if you hit 16% company-owned for Taco Bell and 5% for Pizza Hut and KFC, what might U.S. company restaurant margins look like at the end of that program?

Yes, well, first of all, in terms of the impact of refranchising for this quarter's margin is about a point on a year-over-year basis. And so a lot of the impact from refranchising has already occurred through the -- because we are largely done with Pizza Hut, we're mostly done with KFC, so it's now Taco Bell. And the Taco Bell stuff we're refranchising versus the average margins for our system is a bit lower but not a lot. So I don't expect a lot more impact going forward from refranchising on margins. We'll get a little bit of benefit just as we complete the program, but not a huge amount on a go-forward basis.

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

Could you talk about the KFC China same-store sales performance? You have 13% versus Pizza Hut up 18%, and whether those check and transaction numbers you gave us are kind of similar across both brands? I guess the question is, why do you think Pizza Hut was so much stronger than KFC?

Yes, Joe, I think it just comes down to what David talked about Pizza Hut. Pizza Hut, to me, in China, and we don't talk as much about it, but it just had a phenomenal run the last couple of years. I mean, it's added a variety, it's added value. It's just clicking on all cylinders right now. So I would just say it's really the almost extra special performance of Pizza Hut Dine-In as opposed to its fundamental differences somehow between the categories or so forth. Obviously, they play in different categories, but I think it's probably just Pizza Hut performing in an unbelievable level.

I think you got one that's A1 and another one that's A2, okay? But they're both As.

Okay. And then just a question on pricing. The 5% check increase in the first quarter, can we assume that, that's mostly price? Actually, it sounds like some of it is mix based on what you've said already. And I didn't understand completely what you were saying about the staging or zoning strategy. Is that going to defer some of the pricing plans in China?

Yes, Joe, the pricing that we would have carried into -- or would have had for Q1 would have been the 4 -- approximately 4 that we took last fall, and then half of the 3 from last year. So basically, about 5.5 points of price in Q1.

And just in terms of the -- of what I call the phase-in pricing, I think there's 2 elements to it. One is that there's more differentiation between trade zones. So we're going to increase the number of options that we have by trade zone. And the other is instead of taking one increase everywhere, we're going to take roughly in a number of stages, maybe up to this 5 to 8 range across the country. And we just think that, that's just better from a -- being able to read the customer standpoint, PR perspective, et cetera. So we think that's just the better way to do with.

Rick, when you say 5 to 8 range, is that the number of zones or the pricing?

Sorry, that is the stages it will take us to cover the whole country, basically.

Okay. Do you think it would still price mid-single digit for the balance of the year?

Well, it depends on what happens on the inflation side, et cetera. So as I sort of said at the beginning, we need a few points to get to sort of the margin numbers we talked about.

And your next question coming from the line of Mitch Speiser with Buckingham research.

Many, many of my questions have already been asked and answered, so I'll dig a little deeper and touch on some other things. First on the share repurchase, you did about $78 million in the first quarter. I believe $800 million is the target. Is that still the number to target for 2012?

Yes.

Okay, good. Next, on the -- on Africa, you talked about it a lot at the analyst day, obviously, it's a big market. Can you give us a sense just x South Africa, is there any competition whatsoever on -- and when you think about Africa versus when you went into China a long time ago, is it less of a competitive set at that stage of development?

When we first went into China, there was also very little competition. So I guess similar. But no one's even talking about Africa besides us right now that I've seen. So to your point, I think the competitive situation is quite open. It's more challenging because you have multiple countries. But clearly, we think that if we get the political stability and the economic growth that seems to be materializing, it's a great opportunity for us. But as we sort of said before, don't count -- outside of South Africa, don't build that into your growth model the next few years. This is something for our 2020 vision that we sort of talked about.

Great. And lastly on Pizza Hut in the U.S., another strong quarter. Was it driven by the continuation of the dinner boxes? Do you see the category growing as quickly as you're growing? Any context on the renewed Pizza Hut momentum would be great.

We think we outperformed the category by about 1 point or so, I think, in the first quarter. And I don't think there's anything major different than what we've been doing in the past year or so to drive it. The team, I think, has done a very good job off staying relevant with the consumer.

And your final question comes from the line of Bryan Elliott with Raymond James. Bryan C. Elliott - Raymond James & Associates, Inc., Research Division: Just real quick, food and labor inflation in the U.S., Q1?

Well, for the full year, we sort of said we'd have commodity inflation of 2% in the U.S. So we ran a little bit higher than that in the first quarter, but we don't think we're going to have much of a difference on the full year number at this stage and...

Inflation is low, low single-digit. But the food inflation is -- definitely will be the highest in Q1 and tail off from that, Bryan. Bryan C. Elliott - Raymond James & Associates, Inc., Research Division: And labor, have you seen any changes yet with the economic conditions firming a bit?

No, not really.

Okay, well, I want to thank everybody for being on the call. Let me wrap it up by just saying that while we recognize the year is definitely young, we're definitely please with the great start that we have in all of our businesses. Special kudos to the China team and Taco Bell team. We're really encouraged by the positive momentum we have going forward, and we're confident in raising our full year EPS growth forecast to at least 12%. And as you know, we're very focused on a track record of consistency, and we're very focused on making this another year where we put another notch up there for us. So thank you for calling in, I appreciate it.

And this concludes today's conference call. You may now disconnect.