updated 10/7/2009 9:32:16 AM ET 2009-10-07T13:32:16

A robust performance in China helped chain-restaurant operator Yum Brands Inc. post 18 percent growth in its third-quarter profit, easily beating Wall Street forecasts.

The company that owns Taco Bell, KFC and Pizza Hut also raised its forecast for its annual earnings per share on Tuesday.

Lower commodity expenses and general cost-cutting helped offset a 5 percent sales drop in the United States, where operating profit still grew at a strong clip for the three months.

Yum's net income for the quarter ending Sept. 5 rose to $334 million, or 69 cents per share, compared with $282 million, or 58 cents per share, a year earlier. Excluding one-time items, it earned 70 cents per share.

Revenue for the quarter fell 2 percent to $2.78 billion from $2.84 billion last year.

Analysts surveyed by Thomson Reuters expected Yum to earn 58 cents per share, excluding one-time items, on revenue of $2.79 billion.

On the downside, Pizza Hut posted a 13 percent drop in U.S. sales at restaurants open more than a year. Larry Miller, a restaurant analyst with RBC Capital Markets, called the chain's performance "surprisingly weak" in the highly competitive pizza segment.

"They're losing (market) share," he said. "The category is down, but the other guys are holding (steady). So they're taking some share from Pizza Hut right now."

Yum spokesman Jonathan Blum cited the chain's "premium pricing" in a challenging economy as a reason for its struggles.

"We need to do a better job to demonstrate the value of our quality offerings," he said.

Blum noted Pizza Hut's expanding offerings in pasta and chicken wings. It launched national ads last weekend for the WingStreet brand, now sold in about half its 6,200 U.S. restaurants.

Reflecting Yum's overall strong performance, the company now says it will earn $2.14 for the full year, up from $2.10, excluding one-time items. Yum said the adjustment reflected better performance than expected in China and a lower-than-expected full-year effective tax rate mainly outside the U.S.

Yum, whose brands also include Long John Silver's and A&W All-American Food, reported system sales growth of 11 percent in mainland China and 4 percent in its separate international division.

Chairman and Chief Executive David C. Novak said the company's China and international divisions are on pace to open more than 1,400 new restaurants this year.

"We are more confident than ever in the consistent earnings power of our global portfolio," he said in a prepared statement, though he also said the worldwide business climate remains challenging.

Yum's quarterly operating profit in China shot up 32 percent to $217 million in part because of a $21 million benefit from falling commodity prices.

The company opened 88 restaurants in mainland China during the third quarter and now operates nearly 3,300 restaurants there.

Sales at restaurants open more than a year, a key indicator of a retailer or restaurant operator's fiscal health, fell 6 percent across Yum's U.S. operations, including 13 percent at Pizza Hut.

Commodity deflation cut U.S. costs by $16 million in the quarter, and Yum expects it to reduce full-year costs about $20 million. The company also cut $16 million from general and administrative costs in the U.S. and expects to cut U.S. costs at least $60 million for the year. Its U.S. operating profit rose 18 percent to $171 million.

Miller said the cost cutting and lowered commodity expenses have "been a good tailwind."

Yum's international division, which excludes China, reported a 13 percent drop in profit to $119 million. Currency translations cut the division's profit by $17 million. The international division opened 165 new restaurants in the quarter.

Yum operates more than 36,000 restaurants in 110 countries.

Its shares climbed 39 cents to $35.25 in after-hours trading Tuesday after closing at $34.86 during regular trading.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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