"Our international businesses continue to generate strong,consistent growth," CEO David Novak said in releasing the results."Our proven capability of generating global growth with highreturns and substantial free cash flow gives us confidence that weare on track to deliver another year of solid financialperformance."

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Two publicized health incidents "had the most significant impacton US performance," Novak acceded, but the firm says it will stillopen more than 1,000 units globally this year and has raised itsearnings per share projection in FY 2007 to 11% ($3.23), up from10%. If achieved, it would mark the sixth straight year the firmhas registered double-digit EPS appreciation. Listed on the NewYork Stock Exchange, Yum shares closed at $66.73 on Wednesday.

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Yum's China Division covers the mainland plus KFC Taiwan andThailand. Strong unit expansion of KFC and Pizza Hut in mainlandChina accounted for much of the increase in profitability duringthe first quarter, according to the company. Sales were up 18% to$331 million, and same-store sales in that division rose by 9% forthe quarter.

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In the US, operating profit fell 11% from FY 2006 due to a 6%decline in company same-store sales and a 3% decline in all stores.Taco Bell caused much of the disruption, says the company,attributing their dip partly to an unusually strong start to FY2006 that saw same-store sales rise 8%.

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Bad publicity lingering from an e coli scare involving Taco Belllettuce in late 2006 was even more to blame, says Yum officials,and the chain's image was further dunned in February when a KFC inNew York City became overrun by rats during a construction project.That problem led to "much adverse publicity," Novak says, troubleenhanced via Internet exposure and other media attention.

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In response, Yum is working with agricultural suppliers toimprove the vegetable vetting process, is cooperating with publichealth agencies, and even hired pest control expert Bobby Corriganto offer further advice on the NYC pest problem. "We expect toreview these recommendations by mid-May," says Novak. "We aredetermined to prevent this incident from happening again."

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Strong brand recognition and market penetration should allowTaco Bell and KFC to recover from the recent controversies, companyofficials maintain, adding they expect to ride the internationaltrain to great lengths in 2007. Should the firm eclipse the1,000-unit mark in opening stores overseas again, it would be theseventh straight year Yum has reached that level.

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With more than 34,000 units overall, nearly all of which arefranchised, Yum has advanced into mainland China quicker than otherAsian markets, and is now operating more than 4,000 KFC's or PizzaHuts in the country. Yum's Dallas-based international group, YRI,opened 144 more KFC's and Pizza Huts globally during the firstquarter, and Novak says that pace will accelerate for the remainderof the year.

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Figures for domestic expansion were not provided, but Yum Brandsdid sell 105 company owned units to franchisees in the firstquarter. The transfers are part of a three-year program throughnext year to sell 1,500 company restaurants to franchisees. Some557 have changed over since the beginning of 2006, and fulfillingthe campaign would increase US franchise ownership to 83% of thesystem, up from 77% at the outset.

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