Operator:

Hello, and welcome to the Yum! Brands 2024 Second Quarter Earnings Call. My name is Lauren, and I’ll be coordinating the call today. There’ll be opportunity for questions at the end of the presentation. [Operator Instructions] I will now hand you over to Matt Morris, Head of Investor Relations, to begin. Please go ahead.

David Gibbs:

Thank you, Matt, and good morning, everyone. Despite continued challenging operating environment, I'm pleased Yum! was able to deliver 10% growth in core operating profit this quarter, thanks to our team's strong execution and progress on the initiatives laid out on our last call. While we take comfort in improving global trends and still expect the first quarter warrant the low for same-store sales growth, significant volatility remains, and we recognize sales in some markets are not where we want them to be. The impacts from the Middle East conflict, in addition to a more cost-conscious consumer, have presented headwinds to same-store sales. Despite these tougher waters, we are confident we will deliver on profit growth in line with our long-term algorithm for 2024 and are set up for continued strong growth in 2025. Fortunately, we are well-positioned to navigate these consumer headwinds given the strength of our brands and reputations for value no matter the environment. Nonetheless, ensuring we provide consumer’s affordable options has been an area of greater focus for us since last year with all of our brands having offered disruptive deals and introduced or reintroduced the track of everyday value with examples in the US such as KFC's Taste of KFC deals, Pizza Hut's $7 Deal Lovers, and Taco Bell's Cravings Value Menu. As a result, our brands experienced improving trends relative to the first quarter in the US market, and we continue to refine our offerings in international markets to recapture similar momentum. The second quarter offered signs of improving fundamentals. For example, at Taco Bell, we've begun to see sensitivities to check management stabilize to improve from Q1 into Q2, and have witnessed year-over-year check growth led by items per transaction. Internationally, KFC markets excluding China, that we believe were not impacted materially by the Middle East conflict, reported an encouraging mid-single-digit increase in same-store sales. Across our system, our 2024 commodity inflation has come in lower than we expected heading into the year, helping our franchise partners navigate recent sales volatility. Furthermore, momentum in the critical and strategic areas of our business remains strong. This includes robust increases in digital sales, progress leveraging our scale, continued deployment of our proprietary technology ecosystem and efficiency improvements in our cost structure from efforts underway in the next phase of our journey to be a leading global digital restaurant company. Our twin growth engines, Taco Bell US and KFC International, helped Yum! deliver 3% system sales growth driven by market share gains at Taco Bell US and strong unit growth at KFC International. Combined, these two powerful business units delivered 7% operating profit growth. At an individual level, unmatched innovation fueled Taco Bell US' 7% increase in system sales with Cantina Chicken performing above our expectations. Taco Bell is a clear standout in today's environment, not only achieving same-store sales growth well ahead of the QSR category, but delivering restaurant-level margins near a record high. In addition, Taco Bell's same-store sales grew mid-single digits across all income cohorts, proving that craveable innovation even at a higher price point wins with today's consumers. At KFC International, on a quarter-over-quarter basis, same-store sales showed strong improvement on a two-year trend, and unit growth in the quarter was an impressive 9% year-over-year as franchisees take advantage of strong paybacks. I know from experience, this powerful brand is not constrained by expansion opportunity, but rather its growth and success are tied closely with having the right franchise partner. This is why we are very intentional about who we choose to allow into our system. For example, our new franchise partner in South Korea took over in April 2023 and has drastically improved performance with same-store sales up 17% this quarter. In that vein, the KFC team is tirelessly working to give our franchisees the tools to succeed, including furthering the expansion of SuperApp and the KFC global loyalty program, which is now live in 14 markets. Now I'll discuss our relevant, easy and distinctive brands or RED for short, followed by our unrivaled culture and talent and good growth strategy. Chris will provide an update on our second quarter results, followed by our bold restaurant development, unmatched operating capabilities and balance sheet position and capital strategy. Beginning with the KFC division, which accounts for 49% of our divisional operating profit, we grew system sales 2% led by 8% unit growth. Our same-store sales were down 3%, largely on account of scattered pockets of weakness in a number of markets relating to the Middle East conflict and underperformance in the US market. This quarter, we did not see any improvement in the most directly impacted markets. If Q2 trends hold, the pressure on same-store sales growth for the set of directly impacted markets will begin to abate as we lap the prior year's sales impact beginning in November. Beyond the most significantly impacted markets of the Middle East, Malaysia and Indonesia, we've seen sales impacts from the Middle East conflict surface in several other markets based on store performance comparisons across neighborhoods. In other parts of the world, we witnessed trends improved from the first quarter, including Canada and Central and Eastern Europe, while South Africa's transactions began to improve during the quarter. Another exciting development in the quarter was Yum China celebrating its 200th KCOFFEE, which consists of an adjacent storefront that is part of an existing KFC, allowing a reduced investment and lower operating costs from sharing KFC kitchen facilities. The Yum China team has averaged one new KCOFFEE per day since the beginning of 2024. While these do not count as new units in our system, they are a driver of future same-store sales growth. This quarter, we acquired 216 KFC restaurants in the UK and Ireland, and we have started to optimize restaurant operations there. Lastly, KFC digital sales, excluding China grew nearly 20% with an impressive 40% growth in kiosk sales. Moving on to the Taco Bell division, which represents 37% of our divisional operating profit. US same-store sales grew 5%, outpacing the US QSR industry by a wide margin. Taco Bell executed its winning formula this quarter through introducing a variety of compelling innovations such as the Cheez-It and Secret Aardvark fries. The second quarter also reflected sales contribution from the Cantina Chicken menu, our foray into an elevated chicken offering and a new platform to innovate around. Since the platform launch, Taco Bell's chicken sales mix has increased 10 points with nearly one in four orders, including a Chicken Cantina item. Another part of the team's winning formula is digital in, which digital sales continue to grow at a breakneck pace. In Q2, Taco Bell's loyalty sales were up over 30%. At Taco Bell International, the team is working on building brand relevance. It is still early days in many markets and trends remain volatile, but we remain confident in the long-term opportunity. A restored emphasis on value has forced our teams to be creative with a more limited national marketing budget. In more mature markets within Europe, which accounts for over 40% of Taco Bell International system sales, we saw encouraging signs of improvement with the introduction of value offers. Next, I'll discuss our Pizza Hut division, which accounts for 14% of our divisional operating profit. System sales were flat this quarter and units expanded 3% year-over-year. International same-store sales remained negative in part because of a stalled recovery in Malaysia and Indonesia. We're encouraged Pizza Hut same-store sales trends have improved four points from last quarter with progressing trends in the US and encouraging recoveries in Thailand and Hong Kong. Around the world, our team is actively expanding My Hut Box and introducing Melts, including most recently in India and Thailand. Both platforms lift underdeveloped day parts, expand individual meal occasions and provide attractive price points to our consumers. Since joining Pizza Hut as CEO in 2021, Aaron Powell has assembled an amazing team and is providing strong leadership to drive efficiency, increase accountability, reduce complexity and align the brand to consumer trends. In the US, momentum accelerated throughout quarter with an increase in weekly per restaurant average transactions attributable to a number of value-based promotions and the launch of My Hut Box. Lastly, at the Habit Burger Grill, second quarter system sales declined 1%. Habit's restaurant count increased 5% year-over-year as a result of new regulations in Habit's home market of California that have raised the cost to business, Habit's leadership team has been focused on protecting profitability to remain competitive. Those efforts led to a comprehensive store level labor optimization effort, which contributed to an impressive 520 basis point expansion of restaurant level margins from the first quarter, despite a double-digit increase in restaurant level labor rates in California stores. Same-store sales growth remained suppressed, but we're encouraged by the improvement from first quarter trends despite a more challenged regional backdrop. Subsequent to quarter end, I was pleased to learn Habit's Double Charred Burger, reigned supreme in USA TODAY's 10 Best Readers' Choice Award for Best Quick Service Burger, landing the number one spot and beating out all other QSR and better burger competitors. Now I'll turn to our good growth strategy, starting with our people pillar. One of Yum!'s hallmarks is our people-first culture, which drives recruitment of amazing talent and also builds a deep bench of leaders within the organization. I'm excited about the great work going on at Pizza Hut from a talent perspective, where we recently welcomed Carl Laredo, as the brand's US President. Carl is a seasoned marketing leader with deep experience in delivering impressive results at some of the world's largest and best-known brands. We also welcomed former PepsiCo Executive, Kalen Thornton, as Global Chief Brand Officer, leading the Pizza Hut division's global brand strategy and marketing, including harnessing the power of engaging consumer connections across physical and digital touch points. It is also rewarding to see leaders from Yum!'s deep bench of talent assume bigger roles. Melissa Friebe recently joined Pizza Hut US, as Chief Marketing Officer, after spending 27 years at Taco Bell in various finance, marketing, insights and brand strategy positions. In addition to recruiting and promoting talent and professionals, we're furthering our culture of collaboration and building capability across our company in powerful forums such as KFC's annual global marketing planning meeting. KFC gathered marketing leaders, franchise partners and vendors from around the world to share best practices and consumer insights to keep our iconic brand RED, discuss innovative strategies and sale of delicious products from various markets. Moving on to the planet pillar of our Good Growth strategy. We are making progress on our global goal of reducing greenhouse gas emissions nearly 50% by 2030 with a focus on renewable energy and energy efficiencies in our restaurants and ongoing collaboration with our food suppliers. For example, KFC has reduced emissions by focusing on key areas such as cooking and holding systems, refrigeration and cooling and lighting while Pizza Hut and Taco Bell are collaborating with partners to reduce on-farm emission and encourage sustainable practices. In terms of packaging, we are making progress against our global goals with many markets eliminating unnecessary plastic items like straws, cup lids, stirrers and cutlery. And finally, we're also making a meaningful impact in the communities we serve by continuing to unlock opportunities. As an example, in Thailand, KFC partnered with non-profits and the Thai government to launch the country's first-ever flexible learning curriculum to help students who dropped out of school, gain critical job and entrepreneurial skills. To wrap up before handing over to Chris, we are pleased our second quarter built to a 10% growth in core operating profit despite system sales system sales pressures. While our teams work to improve system sales trends, we are confident the investments we are making in tandem to be more agile, resilient and stronger as part of the next phase in our technology journey will lead to a promising year in 2025. All these efforts underscore our commitment to be the franchisor of choice and deliver more, better, faster, cheaper and safer technology services to our partners. I'm excited about our plans to harness the power of AI, including the expansion of drive-through Voice AI technology with plans to roll this capability out to hundreds of Taco Bell US stores by year-end in addition to testing with KFC in an international market. We are hard at work driving the next phase of our technology journey to unlock future growth by strengthening our business resilience and ensuring we deliver exceptional shareholder value in the years ahead. With that, Chris, over to you.

Operator:

[Operator Instructions] Our first question comes from David Tarantino from Baird. David, your line is muted. Please proceed with your question.

David Gibbs:

Yeah. Thanks, David. I think our thinking hasn't changed, although we learn more, obviously, every week. As I think we said beginning of the year, as we progress through the year, we see sequential improvement every single quarter in same-store sales growth. Obviously, Q4 becomes a much easier lap as we start to lap the Middle East conflict. Q3 is actually a slightly harder lap for Taco Bell, but in general, an easier lap for Yum! And, therefore, we are -- we continue to forecast an improvement quarter-to-quarter in same-store sales growth, tough to forecast. But we know we have all the right levers to pull, and our brands are performing well despite some of these challenges. I mean, KFC International, for example, is up 11% on a two-year basis despite the Middle East impacts. You saw what Taco Bell did in Q2, I think there's a lot of reasons to be optimistic. But as you say, a choppy environment. We know we can get through it this year and then obviously get to much easier laps next year.

Jon Tower:

Great. Thanks. I was hoping to dive a little bit in the G&A because obviously, that seems to be a mover on the core operating profit growth for the year. And I was hoping you can maybe provide a little bit more color on some of the puts and takes through the first half, and then what you see in the back half unfolding? And specifically, how we should think about this piece of the business growing into 2025, should we expect it to return back to normal cadence, especially if incentive comp resets again?

Operator:

Thank you. Our next question comes from Andrew Charles from TD Cowen. Andrew, please go ahead.

David Gibbs:

Sure. Obviously, Taco Bell is a lot of really positive results coming in, in Q2, and we feel good about we feel good about Taco Bell for the balance of the year. Why do we feel so good about the brand? First of all, in this environment where the consumer is probably pulling back a little bit, being the always on value brand. Remember, Taco Bell's Cravings Value menu is always on. It's got 10 items. They're unique items that nobody else in the industry has. And they're not like junior-sized versions of a core item. They're unique. They stand in their own right. They're incredibly craveable. That has served us well, and it really put a moat around when it comes to value. In addition, we have onetime offerings like the Luxe Box at a $7 price point, which is an incredible amount of great tasting food for that price. So we have a great way to play value that makes it hard for others to compete. And then when you couple that with things like the Cantina Chicken launch in Q2, which is really a platform that we'll continue to innovate off of as we move forward. You saw in Q3, we just launched the Cantina Chicken Cheesy Street Taco Chalupas that are off to a good start. That's an example of what we can do with that menu. We'll probably rehit Cantina Chicken in Q4. And then you've got all sorts of other great things going on at Taco Bell like speed of service, improving loyalty program launches. So hopefully, again in the sense of confidence we have in Taco Bell as we move forward. And in this environment, I think we're really seeing Taco Bell stand out from the crowd, outperforming the QSR industry by a wide margin.

Brian Bittner:

Thanks. Good morning. Congrats on navigating a challenging backdrop. You delivered 8% core operating profit growth year-to-date, despite negative same-store sales year-to-date. And this operating profit growth in the first half is on par with the full year guidance, of course. And I know the environment is still challenged, but there reason to believe that overall, Yum! will have better sales trends in the second half versus the first half as comparison these as we've talked about on this call. And G&A is going to remain favorable in the second half. I know there's some timing differences between the third quarter and fourth quarter. But is there an opportunity for profit growth to accelerate in the second half? Is the guidance for 8% now that you've already had that in the bag in the first half, possibly conservative? Or is there anything maybe I'm not looking at in the second half versus first half that I should be more aware of?

Operator:

Thank you. Our next question comes from Dennis Geiger from UBS. Dennis, please go ahead.

David Gibbs:

Yeah. Thanks, Dennis. The development picture is really one that is strongly encouraging. When you think about the impact of the conflict on sales in particular markets, we are still seeing quite widespread growth all around the world. I think I mentioned in my remarks, about two-thirds of our brand country combinations over the last 12 months have built a store. There's a lot of countries that are quite small that don't even have an opportunity to build a small store. So that is impressive right there that it's widespread. As we mentioned, our ability to open gross units looks like going to be very similar to what we did in 2022 and 2023. Now we would like that number to go up every year. So there's probably some small impact from the Middle East that's showing up in that gross unit line. And potential for some, as Chris mentioned in his remarks, potential for some additional closures, perhaps greater than normal the second half of the year. But any stores that would close, particularly in the Middle East markets would have been lower volume stores that people are just pruning their portfolio. We expect the full year impact from development in terms of the ability to drive additional system sales to be very similar this year to last year. So the development story is good. Why is that? Because I think the franchisees have a lot of long-term confidence in the strength of our brands and their businesses around the world and they're getting good paybacks. We meticulously track the paybacks in every market around the country to make sure that our franchisees are getting good returns on their investments.

Brian Harbour:

Yeah, thanks. Good morning guys. I think you mentioned in your prepared remarks just some broader impacts of some of the Middle East issues. I was curious what markets you're referring to with that. And I guess, just more broadly, could you comment on like Europe or some of the other markets that you sometimes highlight has been stronger or weaker? And if there is anything to call out there?

Matt Morris:

Operator, we have time for one more question.

Danilo Gargiulo:

Thank you. I have a question on the sustainability of margins at Taco Bell. So the margins are quite impressive in the context of the labor pressures you're seeing in California, the value -- spend from consumers. So how sustainable do you think these margin improvements are at Taco Bell? And what incremental levers do you expect to deploy going forward? In other words, wouldn't be able to talk about maybe 26%, 27% margin in the next two to three years? Thank you.

David Gibbs:

Well, thank you, everyone, for your time today. I appreciate all the questions. Obviously, we're proud of the results we put up this quarter despite headwinds but we're even more proud and excited about the future as we go into the second half of this year and into 2025. Inflation is moderating, margins are getting stronger, our brands are getting stronger in this environment, Taco Bell putting up really good numbers. The work that we're doing behind the scenes to reinvent how we run the business, to reallocate G&A, to really lean in on our digital leadership and our investments in the AI, the laps are getting easier. We talk about our twin growth engines and how they performed this quarter. But also this quarter, I spent some time with our international Taco Bell franchisees at Taco Con, where we get everybody together from around the world to talk -- compare marketing calendars and the excitement at that convention about the future of Taco Bell was incredibly strong, the quality of the partners that we have for that brand, and although we're not calling that one of the growth -- the twin growth engine today, it's clear that the future for Taco Bell International is quite bright and another reason to be excited about the future. So a quarter that I think demonstrated the resilience of our business model and the strength of our brands and excitement about the future as we go into Q3. Thank you, everybody, for your time.

Operator:

Hello, everyone, and welcome to the Yum! Brands, Inc. 2024 First Quarter Earnings Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions].

Matt Morris:

Thanks, operator. Good morning, everyone, and thank you for joining us. On our call today are David Gibbs, our CEO; Chris Turner, our CFO; and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from David and Chris, we'll open the call to questions.

Christopher Turner:

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our Bold Restaurant Development and Unmatched Operating Capability growth drivers, followed by an update on our balance sheet and capital strategy.

Jon Tower:

Encouraging to see the G&A curve bending. I was hoping you could maybe drill into some of the puts and takes there. Obviously, there were some offsets this quarter with some charges. But curious if you could give us a little bit of context around what's flowing through that line to help move it lower and maybe where you anticipate this moving over the long term for the business. I think historically you've talked about the idea of potentially reaching -- or at one point in time, having that sit at about 1.7% system-wide sales. Is that still a target that you think is reasonable? Or do you feel like you can even move that further as we continue to grow this digital business over time?

Operator:

The next question goes to Brian Bittner of Oppenheimer & Co.

David Gibbs:

Appreciate the question, Brian, and I agree. Hitting 8% in this choppy environment, we're proud of our ability to expect that kind of a result. And I think it speaks to the resilience of our business model and the talent of our leaders. As you know, we don't provide quarter-to-quarter same-store sales guidance, particularly in an environment like this. We're preparing for various scenarios to get to the 8% number. Obviously, one of the lever -- one of the strong levers we have to pull to get to the number is on the development front. And we feel really good about the pipeline that we have in place in development from our partners around the world, and that's something much more so than same-store sales because we can count on to get to the 8%. But as far as forecasting same-store sales growth in this environment, obviously, it's very difficult given the impact that we're seeing.

David Palmer:

I was just hoping to get some more color on international, KFC International, Pizza Hut International. What were some of the highlights and lowlights on same-store sales trends in terms of your brand geography combinations? And more importantly, I'm curious about your reality for 2024 given the exit rates of brand geography combinations. Has any of these changed for the better or worse? How are you feeling about things versus perhaps just a few months ago?

Operator:

The next question goes to John Ivankoe of JPMorgan.

Operator:

The next question goes to Brian Harbour of Morgan Stanley.

Christopher Turner:

Yes. Great question. Look, in all of these deployments, this is us partnering with our franchisees and, of course, they co-invest to bring these platforms to their businesses and they only do that when they see a strong business case. So if you take Taco Bell U.S., which is the one market where we deploy the most of our platforms in combination, I think the tremendous sales results there as they've gone from essentially no digital sales in 2018 to well into the 30% mix now demonstrates the power of the combination of those platforms. In every market around the globe, as we shift sales from nondigital to digital channels, we see increases in check size, we see increases in frequency.

David Gibbs:

Yes. And just to get in, if you're looking for specifics, as you can imagine, when we move people to digital ordering, we see an uplift in check in almost every case, whether it's kiosk or online. When we move people to things like Dragontail, we know we get a -- for Pizza Hut, we know we get a 4-minute savings on delivery time of pizzas and we know we can get drivers to deliver more orders per hour by using it.

Operator:

The next question goes to Dennis Geiger of UBS.

David Gibbs:

Yes. Thanks, Dennis. I think we referred to this somewhere but I'll -- just for completeness, so in Q1, obviously we had a lot of impact by the weather during the quarter. Our business generally improved sequentially during the quarter. Taco Bell, as you know, is 75% of our U.S. operating profit. Taco Bell improved throughout the quarter. And into Q2, we are seeing an acceleration of same-store sales growth trends. So we're feeling good about how Taco Bell is positioned. Remember, they just launched the Cantina Chicken menu at the end of Q1. So we're excited to share the results of that. But suffice to say, it's been well received by consumers.

Operator:

The next question goes to Sara Senatore of Bank of America.

Operator:

The next question goes to David Tarantino of Baird.

Operator:

Hello, and welcome to Yum! Brands, Inc. 2023 Fourth Quarter Earnings Call. My name is Charlie, and I'll be coordinating the call today. [Operator instructions] I'll now hand you over to our host, Matt Morris, head of investor relations to begin. Matt, please go ahead.

David Gibbs:

Thank you, Matt. And good morning, everyone. Before I discuss our results, I want to express our continued concern for those impacted by the ongoing conflict in the Middle East. We continue to prioritize the safety and well-being of our franchisees and employees in the region. Turning to 2023, it was a remarkable year for Yum! Brands as we crossed the $60 billion system sales threshold and exceeded all aspects of our long-term growth algorithm. Despite facing numerous challenges around the world, our incredible teams delivered another exceptional year of growth across our business. We set an industry development record for the third straight year. We made massive strides in scaling our proprietary digital and AI-driven ecosystem, and we continued to build a talent base that I believe is the best in the industry. We delivered 6% unit growth, 10% system sales growth, and 12% core operating profit growth. We entered 2024 having opened just shy of 10, 000 net new restaurants over the past three years and are well on our way to reaching 60, 000 restaurants this year. This growth would not be possible were not for our world-class franchise partners who continue to deploy their own capital based on their confidence to invest behind the long-term potential of our brand. Along with the record-breaking success we've had on development, our digital strategy has helped propel top-line results and improve bottom line profits. Digital sales approached $30 billion in 2023, up 22% year-over-year, with mix now exceeding 45%. At the same time, we have accelerated the deployment of our proprietary technologies to optimize back-of-house operations and make it easier to run our restaurants. In doing so, we are equipping our franchise partners with distinctive capabilities that differentiate them from the competition, especially in emerging markets. I'll now share some more details on the fourth quarter specifically. During the quarter, top line sales were impacted by the conflict in the Middle East region with varying degrees of impact across markets in the Middle East, Malaysia and Indonesia. This represented a low single digit headwind to Yum!’s overall fourth quarter same-store sales growth. This trend has continued into the first quarter and we expect the sales impact to decrease over the course of 2024. Key to our growth is the performance of our twin growth engines, KFC International and Taco Bell U.S., which account for approximately 70% of Yum! system sales and roughly 80% of Yum!’s division operating profit. In 2023, KFC International opened nearly 2,700 new restaurants reaching 10% growth with restaurants opened across 96 countries. More than 80% of unit growth came from our 15 publicly traded franchisees. Entering 2024, I have strong confidence in the durability of KFC's global expansion, for which we continue to see an incremental 50, 000 restaurant opportunity over the long term. On a global basis, Taco Bell crossed the $15 billion system sales milestone this year, reflecting the growing scale of this powerhouse brand. Turning to Taco Bell U.S., which contributes more than 75% of our U.S. divisional operating profit, the brand maintained its two year same-store sales trend in the fourth quarter, outperforming the QSR industry. Taco Bell continued to deliver industry-leading margins at 24% this year, while at the same time leading the QSR industry in several key value perception indicators. Now, I'll discuss our Relevant, Easy and Distinctive brands, or RED for short, followed by our unrivaled culture and talent and good growth strategy. Chris will then provide an update on our fourth quarter results and balance sheet position, followed by our bold restaurant development and unmatched operating capabilities. Starting with the KFC Division, which accounts for 50% of our divisional operating profit and will soon cross the incredible milestone of 30,000 units. For the year, system sales grew 12% with 8% unit growth and 7% same-store sales growth. For the quarter, KFC achieved 7% system sales growth, owing to 8% unit growth and 2% same-store sales growth. Sales trends decelerated during the quarter in several markets as a result of the conflict in the Middle East. KFC China grew system sales by an impressive 20% during the quarter. We had several other standouts markets this quarter, including 16% system sales growth in Latin America and 13% system sales growth in both Africa and Thailand. In Latin America, we targeted new consumers and day parts using compelling value offers, and we expanded our KFC original nuggets. In Africa, the team boosted its breakfast day part with new beverages, including signature coffees at a great price. The Thailand market saw strong transaction growth driven by smart value offerings across all day parts. At KFC U.S., same-store sales were flat this quarter, with trends on a two year basis remaining consistent from the prior quarter. In Q1, the team has planned a range of exciting initiatives, including the Smash'd Potato Bowls, the first bowl innovation since 2019, and the rollout of KFC's first loyalty rewards program. Moving on to the Taco Bell Division, which represents 36% of our divisional operating profit. At Taco Bell U.S., fourth quarter same-store sales grew 3% and 15% on a two year basis, outperforming the QSR industry by three points. Taco Bell U.S. faced tough laps early in the quarter, but finished the year strong with comps up over 5% in the final period. The quarter included a record digital sales mix, which reached 31%, up 7 points year-over-year. Growth in kiosk sales was a large driver, with in-store kiosk sales mix increasing 15 points from Q4 last year. Optimizing our digital channels is also contributing to growth in Taco Bell's loyalty program, with active loyalty users growing 17% in 2023. The team plans to bring exciting enhancements to the loyalty program in the second half of 2024 to capitalize on digital engagement and provide an easier experience for customers to earn and redeem points. While not surprising, I'm always proud to see our incredible Taco Bell team's efforts being recognized, with Entrepreneur Magazine naming the brand the number one franchisor for the fourth year running, and with Nation’s Restaurant News crowning Taco Bell the 2023 brand icon. With an unprecedented range of exciting innovations launching this year, including at least one new product every five weeks, twice the rate of 2023, I'm confident Taco Bell will remain a brand icon for years to come. At Taco Bell International, we delivered 14% unit growth this year. The majority of this growth was contributed by our big four scaled markets including Spain which opened 19 new units this year and is on track to reach 150 units in Q1. As we enter 2024, we will work with our franchise partners in these markets to build brand and category awareness with Mexican food, particularly in Europe and Asia, leaning into fan favorites and expanding protein offerings. Additionally, we are working on scaling and entering new markets that will enable a broader base from which to grow. Next at the Pizza Hut Division, which comprises 15% of our divisional operating profit and will soon eclipse 20, 000 units. In Q4, system sales grew 1% with 4% unit growth and a 2% decline in same-store sales. Sales trends decelerated during the quarter in several markets as a result of the conflict in the Middle East. For the full year, system sales grew 5%, including 4% unit growth and 2% same-store sales growth. At Pizza Hut International, same-store sales were flat for the quarter. The team continues to roll out Melts across the globe to build the individual eater occasion. Strength in the aggregator channel continues to be a bright spot across several markets, including Canada and Latin America. Buy-one-get-one deals coupled with aggregator promotions drove transaction growth in Canada during the quarter. In Latin America, the promotion of our own digital channels in Brazil combined with the New York style pizza helped boost sales for that market. At Pizza Hut U.S., same-store sales declined 4% for the quarter while growing 1% for the full year. The Melts launch and the promotion of the Detroit-Style Pizza in the prior year contributed to a difficult lap this quarter. Pizza Hut U.S. will face another challenging lap in Q1 as same-store sales increased 8% last year, reflecting a full quarter of sales from the Melts platform and the Big New Yorker. However, we expect performance trends on a two year basis to improve in the first quarter. In Q1, the team will launch two limited time offers, including Hot Honey Pizza and Wings, a perfect pairing for fans to enjoy in the run-up to the Super Bowl. In the months ahead, the team will be announcing some exciting innovations to the melts platform. Lastly, at the Habit Burger Grill, for the full year, system sales grew 6%, led by 8% unit growth. Reflecting on 2023, Habit's new leadership team focused on improving all elements of Habit's operations, including expediting a robust kiosk rollout, implementing a sales-driven labor optimization model, and harnessing Yum!’s Co-op purchasing group to lower procurement costs and rationalize SKUs. As a result of these efforts, the team achieved a 380 basis point increase in full year store level margins despite softness in sales. Now I'll turn to our good growth strategy, starting with our people pillar. We take great pride in developing our talent and ensuring we have a strong bench to drive performance and we were thrilled to be recognized in Time Magazine's inaugural list of the Best Companies for Future Leaders, with Yum! ranking an impressive 32nd among U.S. companies. The strength of our talent is evident through Sean Tresvant's official transition to Taco Bell Division CEO on January 1st. Sean joined Yum! in 2022 and is a visionary business leader with a proven track record of driving transformative brand building through his previous role as the Taco Bell Global Chief Brand and Strategy Officer. I'd like to again congratulate Sean as he takes the helm at Taco Bell and I'm confident he and the rest of the team will continue to successfully deliver the brand's long-term global growth strategy. I'd also be remiss if we didn't take another opportunity to recognize Mark King for everything he did as Taco Bell Division CEO to set the brand up for future success, including hand picking Sean as his successor and ensuring that Taco Bell would be in more than capable hands. On behalf of the entire Yum! system, I want to thank Mark for his people first leadership that drove strong results, inspired restless creativity and solidified Taco Bell's unique brand identity that makes it an undisputed global icon. Additionally, Pizza Global Chief Technology officer Joe Park will be moving into the Yum! Chief Digital and Technology Officer role currently held by Clay Johnson, who will continue as a Senior Advisor. I want to thank Clay for his incredible leadership since joining Yum! in 2019, including developing our digital and technology capabilities from the ground up and establishing Yum! as a clear leader in technology in global QSR. Since joining Yum! Joe formed our first ever long-range innovation team before moving on to Pizza Hut, our most digital brand, where he partnered with our global operations and technology leaders to deliver new levels of ease to our customers and improved unit economics for our franchisees. I'm confident he is the perfect person to lead us into the next chapter on our digital and technology journey. Moving on to the Planet pillar of our good growth strategy, in 2023 we remain focused on efforts under our priority areas of greenhouse gas reduction and sustainable packaging. We've made progress on our goal of reducing greenhouse gas emissions nearly 50% by 2030 through investments in renewable energy and energy efficiencies in our restaurants and through ongoing commitments with our food suppliers. In terms of packaging, we are increasing our global use of more widely recyclable plastics in our consumer packaging and we continue to remove plastic packaging in the form of bags and cutlery in addition to eliminating styrofoam. Our continued progress in sustainability has been underscored by several recent recognitions, including being named to the 2024 Dow Jones Sustainability Index North America for the eighth consecutive year and being listed by Newsweek as one of America's Most Responsible Companies for 2024. Before I wrap, I want to pay tribute to our incredible partners at Yum! China. In December, my team and I traveled to Shanghai to meet with CEO Joey Wat and her executive team. That trip reinforced our view that Yum! China is without question the world's most capable restaurant operator. They enable rapid growth and structural cost efficiencies through their dynamic development capabilities and their robust in-house supply chain. Our team sampled amazing new menu items in their innovation kitchen, and we saw firsthand the digital capabilities that enable Yum! China to engage with an astounding 470 million members in its loyalty program. These advantages enable consistent paybacks of two to three years in KFC and Pizza Hut despite evolving market conditions, further testament to their clear competitive advantages in the market. As I look back over the last year, the unique advantages of our diversified system shone through, while the business faced persistent inflation across the globe and navigated shifts in consumer sentiment stemming from regional conflicts. We responded with a focused determination to execute our growth plan, including growing units in 110 countries, meaningfully scaling our technology systems, deepening collaboration across our brands, and delivering both sales and profits well above our long-term growth algorithms. We're confident 2024 will be another banner year with a number of exciting sales driving opportunities, such as enhancing the range of protein offerings at Taco Bell, expanding new category entry points, and significantly boosting the impact of our loyalty program. With a world class team, globally iconic brands, industry leading franchisees, and a relentless appetite for growth, the future is brighter than ever and I am confident that we will continue to maximize value for our shareholders. With that, Chris, over to you.

Operator:

[Operator Instructions] Our first question comes from Gregory Francfort of Guggenheim.

David Gibbs:

Yes, thank you for the question, Gregory. Obviously, in our prepared remarks, and I'll reiterate in my comments now, we are very confident in the pace of development. The pipeline has never looked better for us. Obviously, it varies country by country, but franchisees are getting great returns. You heard yesterday, Yum! China commit to continued strong growth and the great returns they're getting through development. Even Pizza Hut US is picking up the pace of development. We see lots of reasons to be hopeful, and we have a lot of good visibility into the pipeline, the development agreements that we've struck with franchisees and the way we're evolving our asset types, I think is another tailwind for us on development. Like we mentioned when we were in China, we've seen this new model that they've come up with, the satellite Pizza Hut Delco store, which we believe they can blow out and be a real growth driver for them. It's just one example.

Brian Bittner:

Thanks. Good morning. As it relates to 2024, Chris, you said you expected to be a year that you're going to perform in line with your algorithm, of course, meaning that you can grow your operating profits at least 8% excluding the extra week. I just want to dive a little more into this and your confidence around it. I know unit growth is a source of confidence. Clearly, you've outlined that on today's call. But what about the same store sales required to get to that algorithm? Just given the ongoing headwinds from the Middle East, potentially more challenging US environment, how do you think about what's required from the same source of sales perspective after the first quarter as it relates to the need for them to accelerate. Thanks.

Operator:

Our next question comes from David Palmer of Evercore.

Chris Turner :

Yes, thanks so much. I'll start with digital. So yes, look, our digital capabilities continue to drive actually all elements of our algorithm. They support strong unit economics. As you heard, we continue to expand the easy operations capabilities which make our restaurants easier for our team members to operate. And it helps our franchisees drive productivity. And so that is helping us ensure that our franchisees continue to have strong unit economics which allows them to invest in building new stores. If you look at that 10% global system sales growth for the full year, we think digital played a big part of that, both on the unit side and on the same store sales side. And then, as I said, from a profitability standpoint for Yum!, as those capabilities continue to mature, we can get more and more leverage out of our digital technology teams and capabilities in-house. And so that's part of us bending the curve on those investments that I mentioned in our G&A plan for the year. So again, we're very pleased with the progress on the digital front and we still have, a lot of that journey ahead of us, and we described big plans this year to continue to accelerate the roll up.

Operator:

Our next question comes from Jon Tower of Citi.

Chris Turner :

Yes. So the G&A, we ended the year ex-special at $1.17 billion. We expect to be flat on that in the 52 weeks. So there should be an apples-to-apples, comparison on that commentary run plan.

Operator:

Our next question comes from Jeffrey Bernstein of Barclays.

David Gibbs:

Sure. Yes, just to build on my comments about the Taco Bell business in the U.S. and how it's set up to thrive in this environment, the value menu that we've recently tweaked in the U.S. to be $3 and under is actually over indexing a little bit with consumers versus test and expectations, which isn't a bad thing because it's a real competitive advantage for us and it's designed to maintain franchisee profitability. So there may be some small shifts in consumer behaviors, but as I said on previous calls, we just are slowly returning to a more normal operating environment where value is always important in the category as is convenience. And food innovation and great ability. And we think we just win on all those fronts with Taco Bell and why we're excited about 2024.

David Tarantino:

Hi. Good morning. I just want to come back to your comp outlook for the year. And I know you mentioned it several times, some of the reasons you expect things to maybe get better as the year goes on. But I'm hoping that you can maybe elaborate on your view there, whether you think it's the macro getting better, or you think it's more what you have in your initiative pipeline. And then I guess a second part of the question would be if that doesn't materialize the way that you anticipate, do you have levers to pull to still deliver the profit growth you're expecting for the year? Thanks.

Chris Turner :

And then David, as you mentioned, we do have multiple levers to ensure that we land the ultimate component of the algorithm, which is at least 8% core operating profit growth. We've talked about the flat G&A plan, and we also referenced in the comments some of the productivity projects that we have going on. So we're laser focused on that component as well and have plenty of levers we can pull.

Operator:

Our final question of today comes from Dennis Geiger of UBS.

David Gibbs:

Yes. Thank you, Dennis. Yes. So look, Taco Bell in Q4 just to put a little bit more numbers around it, put up a two year number of a plus 15, again, going back to sometimes we forget what we were lapped and we were lapping massive Mexican pizza performance. They were able to lap that and grow on that in a challenging consumer environment. We think that favors them. And absolutely what you said is absolutely true. We're constantly looking to gain market share. And the Taco Bell business has been doing that for now for many years. And we think this is an environment that favors them. So it couldn't be more excited about the growth that Taco Bell has ahead of it in the U.S. And we've really just begun with that brand. And I'm excited about Sean and the team we've got in place to lead that. I'll wrap up by one of my fun facts that, we get hit with so many of them as we're preparing for these calls. But if you're not aware, in the last three years, 25% of all young restaurants have been built. And you're talking about brands that have been 50 to 70 years old and older, but yet in the last three years, nearly 25% of our restaurants were built in the last three years. It gives you a sense for, first of all, how the condition of our asset base around the world and how new it feels given the age of the brands, but also the commitment that our franchisees have to this business. They're investing their capital in building those stores. And we always talk about net new units. That's gross new units. A lot of those stores were placed, the stores that had reached the end of their useful life. So it shows their commitment to the next 20-30 years of the brand and they are fantastic partners. They've always been our competitive advantage. We're seeing that even just managing through the Middle East and how Americana has done such a good job of that. And we couldn't be more excited given the development pipeline, the commitment that our franchisees have and the strength of our brands as we head into 2024. Thank you for your time today.

Operator:

Hello all and welcome to Yum! Brands, Inc. Third Quarter 2023 Earnings Call. My name is Lydia and I'll be your operator today. [Operator Instructions] I'll now hand you over to your host, Matt Morris, Head of Investor Relations. Please go ahead.

David Gibbs:

Thank you, Matt, and good morning, everyone. Before I go over our third quarter results, I'd like to express our deep concern for those affected by the ongoing violence in Israel and Gaza. The safety of our people in the region is our utmost priority and in addition to staying in close contact with our local team members and franchisees, our franchise restaurants in the region are only open when it is safe for staff and customers. The Yum! is supporting affected employees and contributing to humanitarian organizations that are providing critical aid. Our heartfelt wishes for the safety and well-being of innocent civilians and families in the region impacted by this conflict. Turning to our third quarter results, which once again reflect our ability to grow our iconic brands globally through our recipe for good growth. I'm proud to share that we delivered 10% system sales growth, led by 6% same store sales growth and 6% unit growth. We set a Q3 record on unit development, opening an incredible 1,130 gross new units in the quarter. Our digital sales growth remains on fire, with sales up more than 20% year-over-year and digital sales setting a record by exceeding $7 billion. Our third quarter core operating profit grew an impressive 16%. KFC International and Taco Bell US, which collectively contribute approximately 80% of our divisional operating profit, fueled this quarter's growth. Together, these twin growth engines delivered a remarkable 13% system sales growth in the quarter. KFC International has the most units among quick service restaurants in 60 countries and has been adding more absolute units than any other retail brand in the world since 2021. Of course, Taco Bell US is in a class of its own in the domestic QSR category as a culturally iconic brand and clear leader in value perception with the most crave-worthy food in the industry. Taco Bell has unmatched menu flexibility, exceptional pricing power, industry-leading unit economics, and world-class franchise partners. Both businesses are performing at extremely high levels and have ambitious plans to accelerate their growth to even greater heights. Now let me discuss the quarter's results in greater detail through the lens of two of our growth drivers, relevant, easy, and distinctive, or Red Brands, and unrivaled culture and talent. Red Brands are the cornerstone of our strategy and the way we bring this to life continues to evolve as consumers' behaviors shift and new trends are established. Over the past quarter, we've made significant progress in three specific initiatives

Operator:

Thank you. [Operator Instructions] Our first question today comes from David Tarantino of Baird. Your line is open.

David Gibbs:

Yes. Thanks, David. I guess, I would start by saying, if you haven't picked up on it, this is our fifth consecutive quarter of double-digit system sales growth globally. So when you think about the consumer and what we're seeing in our business, obviously, it's a pretty good trading environment for us, and that momentum continued into Q3. And I'll also share that, that momentum is continuing into Q4. So now, part of that is the way that we're managing through some of the consumer pressures around the world. And certainly, you talked about China having their challenges. But there's challenges in every market. The UK, for example, we've got a lot of consumers faced with variable rate mortgages that's pressuring them. So our local UK team has put in place a program to have a Twister of the Day for GBP1.98, which is really resonating with consumers. And they're having in the midst of a good strong year in the UK. In Latin America and Caribbean, I was just down in that market with our great franchisee [Juan Carlo Serrano] (ph), visiting our stores in Colombia and Chile, looking at a new model that they've developed using a commissary which really improves the efficiency of our stores and the quality of product to allow us to provide even more value to customers in a pressured consumer environment. So certainly, there are pressures out there, but our franchisees, I think, do a better job than most by far, of navigating those pressures. I know what's on a lot of people's minds is what's going on in the US. It's well documented that there is more pressure on the US consumers doing loan payments coming due. And certainly, our industry has softened a little bit, but the industry is doing better than most industries, if you look at any of the industry-specific data. For us, though, the US is a much more favorable situation because Taco Bell is the majority of our sales and profits in the US. You saw the great results we put up for Taco Bell in the US this quarter. On a one and two year basis, sales accelerated in Q3. But really importantly, and this wasn't in the prepared remarks, I know you'll find it of interest, if we break down the Taco Bell stores in the United States by income demographic, we see really consistent 2% to 3% transaction growth across all income levels. So our stores in lower-income trade areas are performing well with good transaction growth, just like our stores in high-income trade areas. I think that speaks to the way Taco Bell can play value with things like the $5 box. And how also in a pressured consumer environment, we're probably benefiting a little bit from some trade down in those higher income trade areas. So, our lens on the consumer is obviously biased, but we're putting up strong results. We're seeing plenty of demand and we, once again, I think, are demonstrating we can thrive in any environment.

John Ivankoe:

Hi. Thank you very much. Obviously, you continue to talk about the Yum! owned proprietary technology platforms, which really are geared for making it easier for franchisees to run stores and, of course, more profitable as well. And over years, I mean, certainly, you're doing much more of that, not less. And the rollouts are continuing, and I imagine new programs will be developed in the future. Can you kind of talk about maybe the context of Yum! as a technology services provider. And should we, in our models, longer term, start to think something like percentage of franchise system sales that you can actually earn as this technology service provider for your franchisees?

Operator:

The next question today comes from David Palmer of Evercore ISI. Please go ahead.

David Gibbs:

Yes. Let me share some thoughts on technology to start, and then we'll shift over to Taco Bell. So on the broader technology program. As I mentioned, we like everything about those digital sales dollars as we continue to grow the digital business. We made tremendous progress. But as we've also said, I still feel like we're in the early innings of getting maximum impact out of the broader digital strategy. Of course, it goes across easy experiences, easy operations, easy insights, and we're still in the early days of bringing all of those elements together in common stores. And we really think there'll be a multiplicative effect as we implement more and more of these technologies together. If I just took, for example, the labor productivity benefits, helping our team members make their jobs easier in the stores, focus more of their time on customers and help our franchisees drive productivity, as you bring more of these elements together, you're able to take advantage of more of those productivity benefits. So as we start to layer the Poseidon POS, which makes running the front end easier, as we continue to take digital sales higher, which reduces the workload burden on taking orders and taking payments, you get higher accuracy on order taking, which reduces some of the rework and back of house. And then you bring on things that we mentioned earlier, voice AI at the drive-thru, fizz automation in terms of automated drink fulfillment, which works with the Poseidon POS, you really start to see a vision for the future where you've got a really great customer experience that you're delivering with high productivity for the franchisees. So we expect on this to continue to build and build. If we go to Taco Bell, you mentioned the loyalty program. Loyalty, more broadly, across our brands is a key focus area. We've been at north of 50% of all of our stores around the globe as part of a loyalty program, and that is continuing to grow. We've now implemented in the Middle East. KFC US is coming on later this year, and we continue to refine the way our loyalty programs work. You mentioned Taco Bell. They are now starting to really leverage the insights that we've generated from the early days of that program to refine the program over time. And we've implemented the Red 360, which is the first time we're bringing together insights across our brands in the US. So that will be a driver of Taco Bell growth. More broadly, on the strategy, as you mentioned, category entry points or use occasions is a big focus. We think there's a massive opportunity at lunch. We continue to focus on breakfast. You've probably seen the ads recently during sporting events. So all of those are part of the bright future ahead for Taco Bell.

Andrew Charles:

Great. Thanks. Another Taco Bell question. Obviously, very encouraging 3Q performance and commentary about the start of 4Q. I was hoping you could elaborate on the Cantina menu coming in 2024. I recall this menu item driving success in 2012, but was more upscale compared to US consumer that you guys noted is increasingly seeking value today. So, can you help just us better understand the difference between the upcoming menu versus the one launched a decade ago?

Operator:

The next question comes from Brian Mullan of Piper Sandler. Please go ahead. Your line is open.

David Gibbs:

Yes. Obviously, Taco Bell International is an exciting part of the growth equation for Yum!. We don't provide brand-by-brand development targets, and so we're not going to waver from that. But you know our overall development goals are incredibly ambitious, opening up a new unit every other hour around the world. And as you can see from this quarter that we set a record on development this quarter. As far as Taco Bell in the various markets around the world. Yes, I just got back from a trip to Spain, where I spent some time with our great franchisee in Spain, one of the early adopters of Taco Bell that got to scale quicker than other mark. And you can see, he's done an amazing job of building a moat around the business and creating a differentiated brand much like in the US and now they're reaping the benefits from that and have very aggressive expansion. But when any time you're taking a brand global that's been traditionally a US brand, you're going to -- it's not going to be an even path all the way to the top. There's going to be ups and downs, some market take off, other markets take a pause. So I think in aggregate, we're very excited about the opportunity for Taco Bell around the world. We think it can be a meaningful growth driver in our equation long term. But we're going to make sure that everywhere we go, we're helping our franchisees build the brand the right way, take whatever time that takes, like we did in Spain and the UK to establish the brand in a way that ensures its long-term success.

Jon Tower:

Great. Thanks for taking the question. Just curious, either David or Chris, perhaps you could shed some light on what you think could happen with the NLRB recent joint employer ruling? It's set to go into effect on 12/26 of this year. And curious to know what your thoughts are, whether or not it does go into effect and how it might impact the relationship between franchisee-franchisor in the US over time and potential impacts on your own P&L?

Operator:

Our next question today is from Dennis Geiger of UBS. Please go ahead.

David Gibbs:

Sure. Yes, obviously, we're really pleased with the progress we're making on both of those businesses. Pizza Hut US, for example, has been taking share in the category now for, I think, third consecutive clear. And that -- from all the things that we've talked about on these calls and that you're all seeing in the marketplace, the way that they play the aggregators versus their competition, the way they're launching new products and new forms like Melts, which brings in a new consumer. More recently, you probably saw the announcement about late night and how we're owning that part of the category. So, Aaron Powell and David Graves, their teams are really leaning in and they're on their front foot with Pizza Hut. It's a tough category, of course, but one we're really pleased with the progress we're making. Similarly, KFC, you've seen us do things like launch nuggets and lean in more on the boneless. That's a huge opportunity. It's no secret that chicken is a growing category. We've got the world's greatest chicken brand. We're set up for success there as we evolve our business. And the team that we've got in place there, also a relatively new team, I think, is doing an amazing job of rolling out those kinds of programs that will lead to incremental sales, incremental category entry points as we talked about earlier on the call. So both businesses, I think, poised for lots of growth.

Operator:

Thank you. Our final question today comes from Brian Harbour of Morgan Stanley. Please go ahead, Brian.

David Gibbs:

Yes, obviously, we believe Pizza Hut can and will grow sales. In terms of delivery, one aspect of this maybe is underappreciated is the fact that we now have delivery as a service where we can outsource some of our deliveries through our aggregator partners, that actually was one of the unlocks for us to go after late night when it may have been a little bit harder for us to staff with drivers, being able to hand off those deliveries to our aggregator partners allowed us to extend our hours. I think it's just another proof point in what a nice job the team is doing in thinking through the strategic benefits we can get from the various relationships we have in the category. But here, in a world where the consumer might be a little bit more pressure, obviously, carry out is playing a bigger role and lower price points will play a bigger role in the pizza category. That's one of the reasons why Melts, I think, has landed so well and will be a big part of the growth for Pizza Hut going forward. I appreciate everybody's time today. Obviously, this is a quarter that we're incredibly proud of, much like the last few quarters and never gets old, keep continuing to put up double-digit top line growth and strong bottom line growth. I'll just end with a few comments about what we saw as we went through our internal annual operating plan reviews in the last few weeks. It's something that you guys don't get a glimpse into. But I can tell you, the spirit in the rooms that -- when we met with the teams, the talent in the room that's displayed, and the way that everybody is sort of on their front foot now, we've got the -- all this work that we've done on technology over the last few years, firmly planted so that we now have something that we can leverage in a much bigger way to grow sales. I think our franchisee partnerships have never been better. And all of that adds up to what I thought were incredibly inspiring plans going forward to take market share, grow our businesses the right way for the long term and continue to put up results like you saw this quarter. So we're incredibly excited about the future. We look forward to talking to you on the next call about a little bit more detail about plans for 2024. Thanks, everybody, for your time today.

Operator:

Hello, everyone, and welcome to the Second Quarter 2023 Yum! Brands Incorporated Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I would now turn the call over to Jodi Dyer, Vice President of Investor Relations. Please go ahead, Jodi.

David Gibbs:

Thank you, Jodi, and good morning, everyone. At our Investor Day last December, we shared our long-term vision for Yum! to deliver accelerated global growth. I am proud to say that our second quarter results are further evidenced by our ability to execute against this vision. Through Yum!’s differentiated capabilities our bold restaurant development engines including 1,025 gross new units in the current quarter, and our distinctive digital capabilities, which drove record digital sales fueled the second quarter’s 13% growth in system sales. I'm especially pleased to report that based on our strong year-to-date results and the continued momentum we see in our business, we expect to deliver full year 2023 results, well above our long-term growth algorithm. I'll cover the few high-level thoughts on our second quarter results before sharing some additional details through the lens of the relevant, easy and distinctive brands, and unrivaled culture and talent pillars of our Recipe for Good Growth framework. Chris will then provide some additional color on our second quarter results, followed by an update on our bold restaurant development and unmatched operating capabilities, Growth Pillars. For the second quarter, we delivered same-store sales growth of 9% and unit growth of 6% with KFC setting the pace with a remarkable 19% system sales growth on the foundation of our industry-leading development momentum, distinctive marketing campaigns and relevant new product layers, such as the launch of original recipe hand breaded chicken nuggets here in the US. And as I'm sure you've all heard, Taco Bell, in partnership with another global icon, LeBron James successfully liberated Taco Tuesday in a way no other brand could mimic. As we also discussed in December, our Recipe for Good Growth strategy will be powered by digital and technology. Our distinctive digital capabilities, which enable easier experiences and greater access to our iconic brands continues to unlock incremental sales through higher spend and frequency, as well as incremental profitability for our system. On that note, I'm pleased to report another quarter of double-digit growth resulting in $7 billion in digital sales, representing over 45% of our global system sales. Turning back to our Recipe for Good Growth and our iconic Red Brand, let me start with the KFC division, which represents 50% of our divisional operating profit. Second quarter system sales growth of 19% was driven by 13% same-store sales growth and 7% unit growth. Widespread transaction growth and a strong recovery in our China market as Yum! China detailed in the results earlier this week, powered our same-store sales growth. However, even outside of China, is the global same-store sales growth was up an impressive 10% in the quarter, KFC represents our largest digital business globally on a dollar basis and showed continued momentum with strong year-over-year growth in both digital sales and mix. Among KFC's emerging Markets, I'd like to highlight our Middle East team for the work they did to drive system sales with a focus on their core menu and new snacking product offerings and the South Africa team for their efforts to grow the breakfast layer through a bold marketing campaign with Trevor and Noah. Thanks to unlocking additional customer use occasions, compelling value offerings and continued digital growth both markets posted strong same-store sales growth. Among our developed markets, Western Europe led the way with strong results in check and transactions by balancing disruptive value and core menu items. Turning to KFC U.S., same-store sales grew 5%, improving sequentially with the combination of product innovation and an always on value strategy. Building our first quarter, momentum behind wraps, KFC U.S. launched hand breaded original recipe chicken nuggets to expand its off the bone chicken offerings leveraging the learnings from our significant off the bone business at KFC International. This product innovation was met with an immediate positive consumer reaction, resulting in over 100 million nuggets sold in the first eight weeks after launch. These boneless offerings appeal the younger and new KFC customers and builds upon an already well-established sales layer following the successful launch of the chicken sandwich in 2021. Moving on to the Taco Bell division, which represents 35% of our global divisional operating profit and roughly 75% of our U.S. divisional operating profit. Once again, I'm thrilled to share more external recognition of Taco Bell's brand power and relevance with the brand's inclusion on the Time 100 list of the world's most influential companies. This category of One Brand remains ever relevant by pushing boundaries and introducing and reintroducing exciting and craveable menu items and always being part of the cultural moment and conversation. Congrats to the entire Taco Bell team and our incredible franchisees for yet another well-deserved honor. For the second quarter, Taco Bell's global system sales grew 7% led by 4% same-store sales growth and 5% unit growth. Taco Bell continues to execute its magic growth formula through a balanced set of commercial strategies including building brand buzz, unparalleled value, mass occasions, and digital initiatives. This quarter, the team launched a campaign to liberate Taco Tuesday in a first-ever global Taco Tuesday, campaign spanning 19 markets in partnership with a true global icon LeBron James. The campaign created massive brand buzz with engagement, and mentions in one week for taco Tuesday Liberation surpassing the entirety of the highly successful Mexican Pizza relaunch last year. Other promotions in the quarter contributing to Taco Bell’s winning magic growth formula includes both our $5 Cravings Creo and Deluxe Build Your Own Cravings Box that help sustain our strong consumer value proposition and maintain over. 25% margins. In addition an expansion of trading hours with strong growth at both the breakfast and late night dayparts, helped Taco Bell’s second quarter results. Finally, the team continues to create incremental demand for their digital channels. In the U.S., digital sales increased almost 35% year-over-year with kiosks now deployed in 100% of Taco Bell stores. Taking all of this into account, it is no surprise Taco Bell continues to be a leader in value perception, while also delivering amazing unit economics. For Taco Bell International, system sales grew 18%, driven by development momentum. The global Taco Tuesday Campaign, which launched in June and will continue through the third quarter, leverages Taco Bell's, US cultural leadership building brand equity and consumer awareness with a consistent look and feel around the world. I also want to highlight Taco Bell’s continued progress against our Recipe for Good Growth strategy that included raising $20 million so far this year through its Round Up fundraiser. Throughout the quarter to the Taco Bell Foundation donated these funds to over 400 non-profits and nearly 1,000 live mass scholarships. Next I'll discuss the Pizza division, which accounts for 14% of our divisional operating profit. System sales grew 7% for the quarter, driven by 4% same-store sales growth and 4% unit growth. Pizza Hut International grew system sales 11%, led by 6% same-store sales growth and 5% unit growth. The individual occasion continues to be a growth driver largely on incremental transaction growth from the Melts platform, which in the US has proven to be a self-sustaining layer at an attractive entry price point. Since launching in the U.S. late last year, Melts has now reached 35 markets, up significantly from the 11 markets in the first quarter, now in over half of our global store base. Melts is delivering encouraging early results alongside My Box, our other international individual occasion product offering. Our team is focused on providing distinctive value offerings across markets such as the Super Limo Abundant Value deal in the UAE and the National Pizza Party promotion in Australia. Pizza Hut U.S. grew system sales 2%, driven by 1% same-store sales growth. In the U.S., we introduced new flavor profiles to our Melts platform, providing yet another reason for customers to order from Pizza Hut. The Habit Burger Grill division grew system sales 9% on 7% unit growth. The Habit team continues to lean into its menu strategy of Culinary Forward limited time offerings, highlighting its craft brand positioning through their elevated craveable offering. We continue to expand access points for our customers with the rollout of kiosks now in over 60% of stores on average kiosk sales peaked 10% higher checks, compared with front counter sales and excellent profit flowthroughs, yet another proof point of the value from converting to digital sales. Moving to our unrivaled culture and talent growth driver, which continues to be the foundation of our success, to start, I'd like to recognize Taco Bell division CEO Omar King, who will retire at the end of the year as we celebrate the legacy that Mark will leave at Taco Bell we're thrilled that Sean Tresvant will become the CEO of the Taco Bell division effective January 2024. Sean joined Taco Bell's Chief Brand Officer two years ago and earlier this year, expanded his role to Global Chief brand and Strategy Officer. With Sean's clear vision and strong track record of driving transformative red innovation, I'm confident the Taco Bell will continue to successfully execute its long-term global growth strategy. This is a great reminder of how people are truly at the center of everything we do, which is also reinforced in our Global Citizenship and Sustainability report, which was published last month. The report outlines our strategic investments in socially responsible growth, risk management and sustainable stewardship of our three priority pillars of people, food and planet. I'd like to take a moment to highlight work on key issues across each pillar, including the quality, packaging, and carbon reduction. We remain committed to our purpose of unlocking opportunity in part through our $100 million commitment over five years that we announced in 2020 to knock down barriers to equity inclusions, education and entrepreneurship around the world. Through our unlocking opportunity initiatives, we have funded and activated more than 30 social impact programs in 11 countries, enabling markets to develop localized programs to deliver meaningful change in communities where we operate. We also continue to make progress towards achieving gender parity and leadership roles by 2030, with 43% of global leadership roles held by women in 2022. These are just two examples of the great progress we've made and that how Yum!’s commitment to its people first culture has never been stronger. In addition, we continue to make progress around sustainable packaging, building upon our harmonized cross-brand packaging policy that was introduced last year. Furthermore, we've had great success as we March toward our climate goals to reduce our greenhouse gas emissions by nearly 50% by 2030. To-date, our teams have achieved a 57% reduction in greenhouse gas emissions at corporate restaurants and offices, coupled with a 28% reduction at franchise restaurants. Reflecting on the first half of the year, our teams have put forward an impressive set of results. And looking forward, the picture we see for the second half of the year will be similarly strong. Our confidence comes from our Recipe for Good Growth strategy and the fact that category leaders Taco Bell US and KFC International drive 80% of Yum!’s divisional operating profit. The vast majority of our U.S. operating profit is driven by Taco Bell, the leading brand in both cultural relevancy and affordability, while globally, KFC is positioned with unmatched scale advantages and growth by the franchise partners eager to capitalize on opportunities in their markets and widen their competitive mode. In an uncertain environment, we know that consumers make decisions with value in line with good news is that our brands have always stood for tremendous value in addition to convenience, experience, and craveable food. This is a winning combination that will continue to differentiate us from our competitors and when coupled with our Recipe for Good Growth strategy, I am confident that we can continue to deliver on our long-term vision for accelerated global growth in 2023 and beyond. With that, Chris, over to you.

Operator:

[Operator Instructions] Our first question today comes from the line of Dennis Geiger with UBS. Dennis, please go ahead. Your line is now open.

David Gibbs :

Yeah. Look, as far as the second half of the year, obviously, we're confident. We're well above algorithms. We confirmed that in our prepared remarks, just to give you a little visibility in why we feel that way, Taco Bell U.S. for example has got very strong momentum as we come into Q3. They've launched value. And if we look at all of our businesses on a two-year sales trend, which I think evens out some of the anomalies. We see basically a continuation of what we saw in the first half of the year.

Operator:

Our next question comes from the line of Brian Bittner with Oppenheimer & Co. Brian, please go ahead. Your line is now open.

Christopher Turner:

Sure. And I appreciate the commentary. Just, as far as, why are we able to navigate this kind of environment? Look, I have a lot of confidence in our brand leaders and our marketing teams around the world in so many ways we're writing the playbook for how to build brands in this industry. We have Collider which is an internal group that provides so much to us in terms of our - the inside time and consumer behavior. And I think that'll just shows up in the way we build these brands being top 100 brands in the world. As far as the macro challenges, this is an environment that I would say is a more than normal operating environment. We've come out of a series of years where things have been a little bit more different than we've ever had in the past. But I wouldn't, call it a difficult environment to operate in. One way to think about it is, just to breakdown, our markets between developed and emerging. In the developed markets, we saw mid-single digit sales growth is quarter. It's a stable positive environment and we're past really inflation peak in most markets, obviously, in the US that's been well documented. And this is an environment where we can succeed. Value is rising in importance. But we have solutions and in many ways, our leaders with our brands. KFC for US, for example, in the quarter, their most growth was seen in their low-income consumers, because they had always on value for the quarter, as I mentioned in my prepared remarks. So we can win in this environment and develop markets. Similarly, Western Europe has been documented as a challenged environment for a lot. For us, we had good results there. Our French and German markets did a great job of mixing innovation and value, and delivering strong growth there. So, developed markets, little bit more of a return to normal, more stable and our brands are built to win in those markets. In emerging markets, it's a little bit of a different story. We're seeing double-digit sales growth for the quarter. Little bit more vary, but in general, we're not past the peak of inflation in a lot of these markets. So, we're still taking pricing some of these markets over that inflation, able to pass it on to consumers. But very importantly, we've got positive transaction growth in those markets. So, we're still growing our share in the industry, at the same time, we're navigating a little bit more challenging environment in those emerging markets. But when you add it all up, as you said, we've proven to to demonstrate how resilient our brands are and how we can operate really in any environment and win.

Jon Tower:

Great. Thanks for taking the question. I want to zero in on the commerce platform that you're expanding across number of the brands including Taco Bell now and some of the others that across the globe are hopping onto the platform. Does the company collect any sort of fees from franchisees hopping onto this platform? And if so, how should we think about it rolling into the P&L over time?

Operator:

Our next question comes from the line of John Ivankoe with JP Morgan. John, please go ahead. Your line is now open.

David Gibbs:

Yeah, thanks for the question, John. You're absolutely right. Obviously, one of the first things that got disrupted in the pandemic was sort of transactions and ticket size. The one thing I would add to the list as you mentioned is also party size. As we became much more of an off-premise delivery business, we did see a number of parties per ticket go up. So that neither translated to a slight decline in transactions, but not in the number of eaters in our business. But the great news is for this quarter, we had good transaction growth in our businesses. And that's what I when I was talking about a more return to normal. We are seeing more individual meal occasions let the party sites go back down which I think it's just the reality of coming out of the pandemic. And our business is growing transactions and growing share all around the world. So, I think you're probably right. We're going to get back into that kind of environment and that just not to sound like a broken record, but I feel like we're winning playing that game.

David Palmer:

Thank you. What's alike in the quarter with the unit growth, the KFC results, that the 30% digital sales growth too. I'm wondering, though I know there's going to be some curiosity about Pizza Hut, particularly in the US. And then just maybe a comment about whether you see this thing - this division being an ongoing stable same-store sales grower. I wanted to ask because a lots happened and there has improved marketing, innovation like Melts, the third-party delivery, the systems and a lot more profitable today, but big competitors now doing business with third-party delivery and comps were slower in the quarter. So, also I'm sure there's going to be some curiosity about how you think the brand will do in a slowing economy. So, any sort of thoughts about how you think that brand is positioned well, to be an ongoing same-store sales positive brand? Thanks.

Christopher Turner :

Yeah, look, on the aggregator front by zoom way out at a Yum! level, we're very pleased with our aggregator approach around the globe and the result that's produced in each of our brands and in large number of markets around the globe. In Pizza Hut, and specifically in Pizza Hut US, we implemented last year and we've been pleased with the incremental customers that we found on the marketplaces and the incremental delivery capacity that we've been able to utilize when needed. Of course, keep in mind, this was always our strategy. I wasn't here in 2018 when the leadership team started this aggregator strategy. But recall that, we knew that team knew that aggregators would have an impact on the industry. We wanted to be where the customers wanted to transact with us and we made an investment in one of the aggregators that gave us a front row seat to understanding how this space would evolve. And remember, it was our Pizza Hut CEO who actually sat on the Board of that aggregator. That experience helped to define our strategy. We always intended to implement in Pizza Hut and it's gone as planned. And of course, going forward, we think we have some differentiating capabilities that will help us sustain our competitive advantage in pizza with the aggregators. One of those is Dragontail, which helps to optimize the delivery operations in our restaurants including our interface with the aggregators, plus, we've got some first-mover advantages around marketing expertise and talents in that space that we think will help us continue to drive that business going forward in Pizza Hut.

Brian Harbour:

Yeah. Good morning. Thank you. I just wanted to ask about some of the kind of cost trends that your franchisees are seeing. Obviously, we can kind of see your company store margins. Be curious if that’s also true for a lot of your franchisees on food cost? Is some of that favorability starting to show in other markets? Or do you think that'll be more about 2024 as they sort of past weekend placements?

Jodi Dyer :

Operator, we have time for one more question, please.

David Tarantino:

Hi. Good morning. My question, Chris, is on the G&A outlook. I was wondering if you could, I think you gave us an actual dollar number the last time. I was just wondering, if you could maybe clarify what that number looks like now with the higher bonus accruals? And then, I guess secondly, just as you think longer term about G&A, if you could just update us on your thoughts on where that should sit on a long-term basis as a percentage of system sales. That would be great. Thanks.

David Gibbs:

Thanks Chris and I'll wrap up. I do want to thank everybody for being on the call and just reiterate, this was another really strong quarter for Yum! with widespread growth all brands contributing, system sales at all of our brands were 100 above algorithm and that 19% percent system sales number at KFC is something to be proud of. And we're doing, we're getting those results the right way. It's all about the digital growth, the development, our franchisees being profitable, and a lot of that comes back to the talent that we have at Yum! I was pleased to announce this quarter that, Sean is taking over for Mark. Very few companies have that kind of talent in place to just step in and we know we won't miss a beat and he'll take the business to a higher level of Taco Bell. I will share one fun stat with you if you haven't done the math on this, just in the last two and a half years, we have added 10,000 new gross unit to the Yum! system. That's nearly 20% of our stores were built in the last two and a half years. Do you think about our brands with 60 plus years operating history, but they couldn't be more new and fresh to consumers and they couldn't really be performing any better if you think about the results for the quarter. So, truly astounding. I want to thank all of our team members and our franchise partners that helped bring that growth to life every day. And thank you all for being on the call.

Operator:

Hello, everyone, and welcome to the First Quarter 2023 Yum! Brands Earnings Conference Call. My name is Bruno, and I'll be the operator of today. [Operator Instructions] I would now like to hand over to your host, Jodi Dyer, Vice President of Investor Relations. Please go ahead.

David Gibbs:

Thank you, Jodi, and good morning, everyone. Our first quarter results provide further proof of the power of our portfolio of iconic brands. Both the diverse nature of our global footprint and the advantages of our business model enable us to thrive in any environment. Our incredible teams and franchise partners delivered another strong quarter with 13% system sales growth driven by 8% same-store sales growth and 5% unit growth. A strong set of commercial strategies that balance compelling value and craveable, distinctive products fueled our first quarter sales momentum. We continue to execute on our digital strategy to create more seamless, personalized experiences to drive greater customer engagement and easier access to our brands. These efforts resulted in broad-based acceleration in digital sales growth, leading to a record quarter for both digital system sales of nearly $7 billion and a digital sales mix that exceeded 45%. Importantly, our core operating profit grew 11% in the first quarter, including a one point headwind from the removal of Russia profits, giving us great confidence in delivering on our long-term growth algorithm this year. Before I discuss our first quarter results, I wanted to provide an update on Russia. In April, we announced the completion of our sale of the KFC Russia business to Smart Service Ltd., including all Russian KFC restaurants, operating systems, master franchise rights and the trademark for the Rostik's brand. As part of the sale and purchase agreement, Smart Service has agreed to retain our company employees in Russia. With the completion of this transaction, we have ceased our corporate presence in Russia. Now I'll discuss our first quarter results through the lens of our Recipe for Good Growth framework. I'll begin by talking about our Relevant, Easy and Distinctive brands or R.E.D. for short, and our Unrivaled Culture & Talent. Chris will then share the details of our first quarter financial results before discussing our bold restaurant development and unmatched operating capabilities. First, let's discuss our iconic R.E.D. brands, beginning with the KFC Division, which represents 50% of our divisional operating profit. First quarter system sales grew 15%, driven by 9% same-store sales growth and 7% unit growth, reflecting broad-based strength. Globally, KFC is consistently executing its winning recipe of menu innovation, disruptive value, expanding category use occasions and doubling down on digital initiatives. We were pleased to see strong year-over-year growth in our KFC China business. As usual, Joey Wat and her team did a great job navigating the complex operating environment as consumers became more mobile in the quarter and KFC was there to meet their needs. Additionally, our International, ex China same-store sales, grew 11%, fueled by strong transaction and check growth. We attribute this exceptional performance to strong value offerings, the continued return of dine-in traffic, digital initiatives and strategic third-party partnerships. We've seen sustained momentum across many of our emerging markets, including Latin America and the Middle East. Additionally, we've seen renewed strength in many European markets where the team is promoting value at several price points to appeal to a broader customer base while innovating around our core menu offerings. The focus at KFC U.S. is targeting new audiences and category use occasions by using relevant value and product innovation, as demonstrated with the introduction of boneless offerings, including the return of the DoubleDown sandwich and launch of two for $5 wraps in the first quarter and the national launch of the much-anticipated chicken nuggets early in the second quarter. Moving on to the Taco Bell Division, which represents 34% of our divisional operating profit, before I get to results for the quarter, I want to highlight that Mark King was recently named the 2023 Restaurant Business Leader of the Year for the incredible progress Taco Bell has made, growing the brand while expanding unit economics and strengthening relationships with franchisees under his leadership. Seeing our world-class talent recognized more broadly across our industry gives all of us at Yum! Great pride. Taco Bell first quarter system sales grew 12%, led by 8% same-store sales growth and 6% unit growth. These incredible results build on years of sustained top line strength as the team executes on its consistent growth formula, which leverages the combination of brand buzz with unparalleled value offerings, buzz occasions and digital initiatives. This quarter, Taco Bell created customer buzz around craveable product offerings that included the Crispy Melt Taco and the Grilled Cheese Burrito while still providing everyday value through $2 Burritos on the Cravings Value Menu. Strong demand for the Grilled Cheese Burrito is a fantastic example that proves Taco Bell can win in the big burrito category and participate in higher price points while maintaining value leadership. Taco Bell U.S. is leaning into its digital initiatives to drive customer engagement, with year-over-year digital sales up approximately 60%, leading to an 8-point improvement in its digital mix. Taco Bell recently launched delivery-as-a-service through its mobile app to create easier access for our customers to get our craveable products. Additionally, the team also continues to make progress against our Recipe for Good Growth strategy with the ongoing condition of their packaging suite to more recycle-ready options. Taco Bell International grew system sales 25% in the quarter, driven by continued development momentum and strong value proposition through core menu innovation offerings. Next, I'll discuss the Pizza Hut Division, which accounts for 17% of our divisional operating profit. System sales grew 10% for the quarter, driven by 7% same-store sales growth and 3% unit growth. Same-store sales growth accelerated sequentially from the fourth quarter, driven by China and continued strength in the U.S. Pizza Hut International, which accounts for 9% of our divisional operating profit, grew system sales 10%, led by 5% same-store sales growth and 5% unit growth. Following the successful launch of Melts in the U.S., the team launched this breakthrough product in 10 additional markets, including the U.K., Canada and several markets in Latin America. I'd like to recognize our global pizza team for their collaborative efforts to scale this winning innovation quickly. Our markets not only shared consumer insights and product innovation at unprecedented speed, but the operations team also used augmented reality to expedite training of our international team members through our intelligent coaching app. Pizza Hut U.S., which represents 8% of our divisional operating profit, achieved 10% system sales growth with 8% same-store sales growth and flat unit growth. Melts, in combination with the Big New Yorker in the quarter, helped to drive positive transaction growth by attracting new and repeat customers. The team continues to expand strategic partnerships and is now integrated with the three major food aggregators in the U.S. We view aggregator marketplaces as an additional channel to provide customers greater access to our brand, while also attracting an incremental customer. The Habit Burger Grill Division grew system sales 8% with 8% -- the Habit team continues to focus on expanding its abilities through mobile app user base and partnering with third-party aggregators. Before moving on to our Unrivaled Culture & Talent, I want to take a moment to thank Russ Bendel and celebrate his accomplished career in the restaurant industry as he plans to retire next month. Russ' passion for restaurants has always shined through and anyone who knows Russ knows that what he really values above all else is people. Everyone is a friend to Russ, and he is loved by all who have had the privilege to work beside him, whether in a kitchen or an office. We recently announced that Russ's successor is former KFC Global Division CFO, Shannon Hennessy. Shannon is an exceptional leader, and we're excited to have her drive the next chapter of growth for Habit and continue Russ' focus on people. More broadly on our Unrivaled Culture & Talent growth driver, we've held powerful forums this year that galvanized our franchisees and top talent around our Recipe for Good Growth. In February, we hosted our 11th International Franchise Convention in Singapore, bringing together our global brand leadership teams and many of our 1,500 franchisees from around the world. Having attended this convention for many years, I've never seen this level of unity and enthusiasm for growth, particularly as it relates to development and broad strategic alignment with our franchise community. Our franchisees are some of the most growth-minded entrepreneurs in the world, and the international franchise convention was an opportunity to learn from, recognize and celebrate each other's achievements. Our partnership with our franchisees is as strong as it's ever been. We are strategically aligned to keep our iconic brands R.E.D. and our global growth momentum strong by leveraging the investments we've made in consumer insights, our digital ecosystem, innovative technologies and data analytics. Additionally, we are focused on unlocking opportunities for our people and communities while promoting equity inclusion and belonging across all aspects of our business. We were proud that many of our leaders, including myself, participated in the Women's Foodservice Forum as we focus on elevating all voices and achieving gender parity globally by 2030. We also announced the launch of Franchise Fast Start, the program funded by Lafayette Square to provide lending support to expand Yum! franchise ownership in underserved communities in the U.S. As a result of our efforts, we've recently been named to Newsweek's America's Greatest Workplaces for Women and Forbes America's Best Employers for Diversity List. To wrap up, I'm always thrilled to start the year with fantastic momentum, especially when the strength is broad-based across our global portfolio. I remain confident in our ability to navigate any economic environment as our brands stand for unmatched value and convenience, providing a range of products and price points to meet all customers' needs. We are poised to maintain our robust sales momentum given our pipeline of R.E.D. product innovation, accelerating digital sales, strengthening operational execution and compelling value across our global portfolio of iconic brands. With that, Chris, over to you.

Operator:

[Operator Instructions] Our first question comes from Gregory Francfort from Guggenheim Securities.

Christopher Turner:

Yes, good question around the labor environment. If you step back at a macro level, we think about this in developed versus emerging markets. And in our developed markets, we have had some labor challenges that have been well publicized, not only in the restaurant sector, but in all sectors over the last couple of years. Those labor challenges are abating. We're seeing application rates increase, retention rates continue to increase, and our staffing levels are back to at or near 2019 levels. And we've seen labor inflation abate in those markets which is helping our franchisees from a margin standpoint. If we go globally, because of the position of our brands and the employment markets in those emerging markets, we really haven't had big labor challenges there. And we've seen less labor inflation throughout the last three to four years, and that trend continues. I'm sure there's some pockets for franchisees who are dealing with that, but in general, the Yum!'s culture and focus on talent, plus the way that our franchisees have led their teams during the last couple of years, plus our digital innovations in our Easy Operations area, which make running the restaurants easier, are all contributing to an improving labor environment.

Brian Bittner:

As it relates to your core operating profit in the first quarter, it was very strong 11%, very strong start to the year. And interestingly, it actually doesn't really incorporate yet a strong recovery from China. So as it relates to your guidance core operating profit of at least 8% for the year, kind of in line with your long-term algorithm, I'm wondering if you can unpack whether this is possibly tilting a bit conservatively after your strong results in the first quarter? Or maybe you can guide us through the puts and takes as the year unfolds with your core operating profit.

Operator:

Our next question comes from Jon Tower from Citi.

Christopher Turner:

Yes. Thanks, Jon. Good question. I'm going to step back and start at a global level. And if you think about our development, keep in mind more than 90% of our development is outside of the U.S. And when you think about where that development is driven, we shared at the Investor Day that 60% of our global development is driven by 15 publicly traded franchisees. If you go look at the financial factors on those franchisees, you see that they've got, on average, less than one turn of leverage. The two largest have significant cash on hand with no debt. So the financial health, in general, of our 3C franchisee base around the globe is very strong and we think gives us a competitive advantage in this sort of environment to continue to strengthen development ;whereas competitors whose franchise systems aren't as strong, we think, will be at a disadvantage. If I drill into the U.S., keep in mind that Taco Bell is the vast majority of our development in the U.S. Our margins at Taco Bell U.S. have continued to be strong. You saw our restaurant margins this year were a slight improvement versus last year. So we continue to drive strong growth at Taco Bell with strong margins. Those are strong returns on those new units. So we feel like we're in a very competitively advantaged position relative to that issue.

Operator:

Our next question comes from John Ivankoe from JPMorgan.

Christopher Turner:

Yes, Jon, I'd say, in general, we all know that providing a great customer experience at the restaurant is critical to our business. And if you look at our sales growth results, double-digit growth in -- from a system sales standpoint for all three of our big global brands, we feel like, in general, we're doing a very good job of that. Are we always looking to improve? Of course. I go to our digital capabilities as one example of how we're elevating operations. You go to that Easy Operations pillar, one of three areas of our digital strategy, and we talked about we continue to implement tools that make the restaurants easier to operate and then improve the customer experience. Dragontail being a great example. David and I were in the U.K. just a couple of weeks back, and we got to see in Pizza Hut how Dragontail times the pizzas coming out of the oven, with the delivery drivers getting to the restaurant, that's translating to better customer experience. They're getting hotter, fresher pizzas faster. So that's just one example of how we elevate on that front. Where we do have small pockets of significant improvement opportunity, we manage those situations, and we referenced that on the call. We talked about the Pakistan situation where we felt it was the right move to make a move in our franchise base. The strength of our overall global development gave us the room to do that. But that's just one example of where we made a targeted change to improve our operations.

Operator:

Our next question comes from Dennis Geiger from UBS.

David Gibbs:

Yes. Thanks, Dennis. Obviously, we had a strong start to the year with Q1. And we don't normally comment on trends intra-quarter, but what I will say is we're off to another strong start in Q2. No significant change in momentum from Q1. Of course, the puts and takes will look different. Some businesses are doing a little bit better than in Q1. Some have tougher laps. But it gives us a lot of confidence that our teams are doing all the right things to connect with consumers. And this environment is a healthy environment for us, particularly with our brands. When you talk about the U.S. consumer, Taco Bell is just so well positioned to weather any kind of -- there was some kind of pullback, as you saw from the strength they had in Q1, their ability to offer value menu offerings under the Cravings Value Menu, but also offer innovation like the Grill Cheese Burrito for people that might be trading into the category if the economy started to soften. So from where we sit, we feel really good about the momentum in the business. And the pricing actions that you referenced were -- will probably start to roll off a little bit. But at the same time, we've seen inflation abate. I'll give you another good fun stat. In Q1, KFC, as you know, rolled out those $5 wraps. The strongest sales that they saw in a customer segment in Q1 were with the lowest-income consumers. So the part of the business -- the part of the consumer base lifting sales was from low-income consumers because they did a great job connecting with them through that offering. Same thing could be said with Pizza Hut under 6.99 melts. So we know we have all the tools in our arsenal to win in these competitive environments.

David Palmer:

Wondering if you could provide any details on the ongoing sales recovery versus pre-COVID levels for key KFC International markets. We don't often get to see some of the country-level statistics. And I'm wondering how you're thinking about that multiyear recovery. Where is it still accelerating? And perhaps if it's slowing in certain places, why would that be, maybe shifting patterns between delivering at home or other consumer weakness perhaps cropping up here or there.

Operator:

Our next question comes from Andrew Charles from TD Cowen.

Christopher Turner:

Yes. Thanks. Good question. If we talk about Q1 specifically, I think all the factors that David mentioned around our confidence in long-term development trajectory still hold. We've got strong new economics. We've got tremendous franchise partners. We've got lots of white space out there. And we've got the best development teams in the business. If I go into Q1, keep in mind, don't read too much. We said that this year would be more weighted towards later parts of the year. But in Q1, we put up 746 gross new units. That's our second-highest total ever. That reflects that our franchisees are investing to build restaurants. And that was despite what you heard on the Yum! China call yesterday, which is they were dealing with delays related to the Chinese New Year, delays in contract signing and building permitting that were tied to COVID. And they talked about their view on the strength of their pipeline going forward. If I go to the net new unit side, one of the things that we're doing is we're using our strength in growth development to advance our assets to strengthen our global asset base. I talked about how we, in certain cases, strengthen the franchisee base with the Pakistan situation. Another thing we're doing is continuing the Pizza Hut asset transformation where when we close a unit, we're opening another one in the same trade area that is a stronger, higher-performing unit. And the third thing we're doing is when we have a few low-volume units that need to be cleaned up, we'll take advantage of opportunities to do that. But in general, we remain really confident about the long-term trajectory. And as I said, we expect this year to look similar to 2021 and 2022.

Operator:

Our next question comes from Jeffrey Bernstein from Barclays.

David Gibbs:

Yes. A good question. And you're spot on, obviously. Our goal obviously is to be there for our customers for every occasion, not just for family meals or just for individual meals. Pizza Hut has a very conscious strategy through Melts in the U.S., which has gotten a lot of the headlines, but also an offering that they have called My Box, which is an individual meal offered around the world to go after more individual occasions. Pizza is obviously traditionally a family-sharing occasion. So Pizza Hut and KFC with buckets tend to skew more towards family sharing. And Taco Bell with their multiple individual items that you can piece together for your own meal, skew more towards individual meals. And that's why at the beginning of the pandemic, you saw Taco Bell rolling out family meal options because that became the preferred way that people were accessing our brands early in the pandemic during lockdown. So they're continuing to lean in on ways that they can capture more of the family sharing occasion. And then Taco Bell -- and then Pizza Hut and KFC are leaning more on individual meals. Obviously, nuggets, the $5 wrap deal and other offerings we have around the world, the launch of sandwiches more recently, are all designed for individual meals.

David Tarantino:

Just a couple of clarifications, Chris, on the outlook. First, on the unit growth commentary, you said you expect this year to look a lot like the last two years. Are you talking about net unit growth or gross opening? So I guess your net unit growth has been close to 6% ex Russia in the past few years. So I just wanted to clarify that. And then secondly, I was wondering if you have an update on your G&A guidance for the year.

David Gibbs:

Well, thanks, everybody. I appreciate all the good questions. And obviously, we're excited about the strong start to the year, the momentum that we have continuing into Q2 and the fact that we've raised our algorithm and are beating it on all measures today. Look forward to updating you on our progress on our Q2 call.

Operator:

Hello, everyone, and welcome to the Yum! Brands, Inc. 2022 Fourth Quarter Earnings Conference Call. My name is Charlie and I'll be coordinating the call today. [Operator Instructions]. I will now hand over to your host, Gavin Felder, Chief Strategy Officer and Interim Head of Investor Relations, to begin. Gavin, please go ahead.

David Gibbs:

Thank you, Gavin, and good morning, everyone. 2022 truly was a landmark year for Yum!. In spite of the challenges from significant spikes in commodity inflation and pockets of labor shortages, our world-class teams and franchisees partnered together to deliver another year of amazing growth. We achieved record-breaking industry development, opening 4,560 gross units that translated to nearly 3,100 net new units, beating our prior record set just last year and ending the year with over 55,000 restaurants globally. For the full year, system sales were up 8% and core operating profit was up 6%, which includes a 2-point headwind from the removal of Russia profits this year. Perhaps the most impressive performance came from Taco Bell, finishing 2022 with same-store sales growth of 8%. Taco Bell also bucked the industry trend on margins, holding company operated margins flat from last year despite elevated industry-wide cost pressure. KFC International delivered a record year, opening approximately 2,400 gross units and nearly 2,000 net new units, translating to 9% unit growth. Combined, these 2 parts of the business account for approximately 80% of our divisional operating profit. We finished the year on a high note with system sales growth of 10% in Q4, driven by 6% same-store sales growth and 6% unit growth, contributing to 22% core operating profit growth, which includes a 2-point headwind from the removal of Russia profits this year. Such incredible performance under highly challenging conditions underscores the tremendous confidence I have that even after a remarkable 25 years of growth as a public company, our best days are clearly ahead of us. Before I discuss our 2022 results in detail, I wanted to give a brief update on our planned exit from Russia. As mentioned during our Q3 call, we have a signed purchase agreement to transfer ownership of our Russian KFC restaurants, operating system and master franchise rights to an existing KFC Russia franchisee. We expect the transaction to close following satisfaction of all closing conditions. Following the closing, we will have ceased our corporate presence in Russia. I also want to acknowledge the devastating impact of the earthquake that happened earlier this week, affecting our teams in Turkey. Our people remain our #1 priority, and I want to recognize the effort from our franchisee, Ilkem Sahin, as he and his team worked to prioritize people's safety as they navigate through this tragedy. As we shared at our recent Investor Day, our strategy is guided by our Recipe for Good Growth. And today, we will discuss our 2022 results through the lens of that framework. I will talk about 2 of our growth drivers

Operator:

[Operator Instructions]. Our first question comes from David Tarantino of Baird.

Christopher Turner:

Yes. David, thanks. Good question. As we look forward to next year and beyond, we're still confident in the future. As we shared at Investor Day with the raised algorithm, we feel confident in the trajectory of the business and nothing has changed in that outlook as we come into 2023. As you mentioned, the China component of our sales, you heard Yum China talk last night about being cautiously optimistic. So we'll continue to work with them. But in the long run, we are very bullish on the China market as it comes out of COVID, but of course, the timing of that is uncertain as they shared on the call last night. Of course, to the extent that we have rebound in that China sales, it does come at a lower royalty rate as you factor that into the plan for the year. The other elements, I think, are in line with the -- with what we shared in the algorithm. You heard the guidance that we shared on G&A for next year. And so our focus is on driving that growth. And of course, every day, it's our mission to come in and over deliver on that algorithm if we can.

Dennis Geiger:

Thanks, Chris, for that color on G&A for the year. Helpful. Wondering, David or Chris, if you could speak just a bit more to the strength that you're seeing from a sales momentum perspective globally and the resilience really across the brands in the current macro, and how that guides sort of how you're thinking about 2023 if consumer pressure increases. I mean strength at Taco Bell, KFC non-China, International, Pizza Hut U.S. even momentum building. Just any additional color given the last several month's momentum for how you think about '23, particularly if globally, the macro situation gets worse.

Operator:

Our next question comes from Andrew Charles of Cowen.

David Gibbs:

As far as Taco Bell and the amazing job that they do, segmenting their consumers and providing each consumer what they want. That's what we talked about at Investor Day. And obviously, Taco Bell has some amazing value offerings that have been in their menu now for quite some time, on the Cravings Value Menu. But it doesn't -- it's targeted to a certain set of consumers and halos the entire business. So as the environment gets more competitive, we're already in the value game at Taco Bell, and we're already doing a great job. I don't see us changing anything. Well, we're connecting and we're winning because of value. That's why you saw the great numbers that we just put up in the quarter. But the brand with amazing margins, steady year-over-year, just has all the tools at its disposal to navigate any kind of environment and deliver great margins, great top line sales growth and a great proposition to consumers.

David Palmer:

Congrats on the very strong unit growth. I wonder how you're thinking about EBIT margin over time. In 2022, it was 32%. And it's been near 35% before, but business mix is always changing. I wonder though, how you think about that margin over time. Do you think you could get back to 35% or so in the next few years? And I'm thinking about certain flow through like a China license fee recovery could be very good incremental margins. And so I'm just wondering how you're thinking about the potential for that EBIT margin.

Operator:

Our next question comes from Jon Tower of Citigroup.

Christopher Turner:

Yes. First, on G&A in Q4, we had reported G&A of $1.140 billion but that included special expense. We had approximately $20 million in special expense. So we landed broadly in line with our full year plan, a little bit to the high end of our planned range. There were a number of small items, none of them major, but I'll give you 1 example. As we had to split out the Russia business to prepare for sale, we lost some of the fixed cost leverage in our European G&A. But again, going into next year, as I mentioned earlier, the philosophy that we shared at the Investor Day still holds. We are focused on having a lean G&A model while investing in the things that drive long-term growth and health and we'll have a lower G&A growth rate into 2023. In terms of how 2023 is shaping up, as I said earlier, there's nothing that we're seeing at the start of the year that dampens our confidence in delivering our long-term growth algorithm this year and beyond.

John Ivankoe:

I was looking for a little bit -- a more detailed color in terms of what's happening at a consumption level in some of your major markets between your dine-in or in-store type of traffic, delivery traffic. Are you actually seeing consumers trade down in your opinion to your brand? Are you seeing your core customers come more often? Is there any slippage at all on the lower income consumer? Just kind of, I guess, a little bit more color in terms of -- I know it's always hard talking about a big global business with 3 and now 4 brands, but if there's anything that you can really provide some more detail in terms of what's going on below what's obviously very good aggregated results.

Gavin Felder:

Operator, we have time for one more question.

Gregory Francfort:

I just want to ask about Pizza Hut U.S. I mean it seems like the business has picked up the last few quarters. And I'm curious if you're seeing share gains or increased pricing. Or just -- any thoughts on what's going on there would be helpful.

Operator:

Ladies and gentlemen, thank you for joining today's call. You may now disconnect your lines.

Operator:

Hello, everybody, and welcome to today's Yum! Brands, Inc. 2022 Third Quarter Earnings Call. My name is Drew, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Gavin Felder, Chief Strategy Officer and Interim Head of Investor Relations to begin. Please go ahead.

David Gibbs:

Thank you, Gavin, and good morning, everyone. Our strong top line momentum this quarter highlights clear demand for our iconic brands. We delivered 10% system sales growth underpinned by 5% same-store sales growth and 6% unit growth. While the broader macro environment evolves, our brands continue to thrive by being distinctive, creating excitement for consumers and by delivering exceptional value and convenience. The investments we have made in areas such as consumer insights, marketing analytics, and new technology platforms allow us to act with pace and confidence to meet the needs of consumers around the world. I'm particularly thrilled about the performance of the KFC and Taco Bell division that were both standout performers this quarter. KFC did an excellent job in driving transaction growth through its omnichannel approach, leading to a sequential improvement in comps from the prior quarter. Taco Bell is winning, thanks to its ability to generate and amplify standout moments in culture and translate the resulting top line growth into impressive restaurant-level margins. I'm also excited to share that we opened a total of 979 gross units across 74 countries, proof that our development engine is powerful and diversified. As these results show, our committed and well-capitalized franchise partners are seeing opportunities to invest in the growth of our brands for the long term. Next, I want to provide an update on our Russian business. As Gavin mentioned, we have a signed purchase agreement to transfer ownership of our Russian KFC restaurants, operating system and master franchise rights to an existing KFC Russia franchisee. Following the completion of the transaction, we will have ceased our corporate presence in Russia. I want to say that I'm incredibly proud of how our local teams have managed through this extremely difficult time and prioritized the safety of our people in the region. Our number one priority is our people, and they will always be at the center of every decision we make. Now I'll talk about two of our growth drivers; our Relevant, Easy and Distinctive Brands, or RED for short, and our unrivaled culture and talent. Then I'll provide an update on our Recipe for Good. Chris will share the details of our third quarter financial results before discussing our bold restaurant development and unmatched operating capabilities growth drivers. First, I'll discuss our RED brands. Beginning with the KFC division, which accounts for 51% of our operating cost. System sales grew 12%, underpinned by 7% same-store sales growth and 7% unit growth. As these results prove this business can perform well in a multitude of environments, even as certain pockets of the local portfolio that experience tightened macro pressures. At KFC's International business, which represents 46% of our operating profit, our system sales grew 14%, driven by an 8% increase in same-store sales. This represents a significant acceleration from the 1% same-store sales growth in the second quarter. We saw notable strength in the Middle East, India and Africa, thanks to momentum across our digital channels and a focus on operations and value. Our Middle East market is truly on fire, where system sales grew an impressive 46% with strength across all channels, including a ramp-up in the use of kiosks and Click & Collect. Our India market saw system sales grow 45% during the quarter with customers enjoying the convenience-driven 7-minute Express takeaway guarantee. In Africa, where system sales grew 31%. The team is focused on providing an easy and convenient digital experience for consumers. They've done an outstanding job rebranding their Click & Collect channel, as well as rolling out kiosks across the market to drive sales, underpinned by talent sharing offers like the all-in-one fees. At KFC US, we brought back our famous $5 Mac & Cheese bowls as a value-oriented item this quarter. The reboot of this much lost product helps drive a positive 2% same-store sales comp. Additionally, for a limited time, we launched a $6, two-piece drum and thigh, which has driven positive results in a meaningful sequential improvement in transactions. Moving on to our Taco Bell division, which represents 34% of our operating profit. We saw extremely strong momentum with system sales growing 9%, led by 6% same-store sales growth and 5% unit growth. At Taco Bell US, system sales grew 8% for the quarter, undermined by a 7% same-store sales growth and 2% unit growth. The brand is bringing to life is one-of-a-kind venue through creative innovation in a way that only Taco Bell can. This was most evident with the team adding products to its $2 creating menu, such as the Cheesy BB Burrito, while innovating with premium offers like the grilled cheese burrito. Taco Bell is a brand is truly relevant, easy and distinctive with the unique ability to stand for value with the current economic environment, you have a broad enough range to appeal to consumers across every demograph. As we enter the fourth quarter, we're even more excited about the momentum in Taco Bell US with the relaunch of the Mexican pizza, which occurred in mid-September. At Taco Bell International, system sales grew 26%, driven by 30% unit growth and 5% same-store sales growth. In the third quarter, five markets delivered double-digit system sales growth, marking another milestone in Taco Bell's international expansion journey. Year-to-date, we've opened 111 net new units, almost double the number opened at this point last year. We're driving scale in key markets, helping our franchisees leverage their size to optimize marketing spend, expand development capabilities and gain local sourcing efficiencies. Next, at the Pizza Hut division, which accounts for 15% of our operating profit, our system sales grew 5%, led by 5% unit growth and 1% same-store sales growth. At Pizza Hut International, which accounts for 8% of our operating profit, system sales grew 6%, underpinned by 8% unit growth and 2% same-store sales growth. Across our markets, we are focused on finding ways to expand our reach to become a more everyday brand. For example, as a leading everyday value offering, the Pizza Hut India team launched a fun flavor pizza costing roughly $1. More broadly, the My Box value platform is proving to be a key traffic driver through innovation and giving customers the option to customize with new entrees and sides. The platform helps us lean in on the individual meal and [indiscernible] and is now live in over 50 countries. I'm also pleased to say that our emerging markets are seeing a recovery in traffic and demand, as we lap the impact of COVID. Pizza Hut US, which accounts for 7% of our operating profit, saw system sales growth 2%, driven by 1% same-store sales growth. A key focus for this business has been to provide our customers with the ability to access our brands wherever they are. As part of this initiative, we continue to partner with third-party aggregators and integrate them into our POS systems with 90% of our system using at least one-third party marketplace. In addition, we are working to ensure we have the right value offerings to meet consumer demand and maintain franchisee profitability. This effort led to the introduction of items such as the $6.99 medium one topic Pairs deal and the return of the Big Dinner Box as an abundant family value offering. Lastly, as the Habit Burger Grill, same-store sales trends on a three-year basis have sequentially improved since the second quarter. Additionally, we continue to see consumers download our mobile app, leading to a 10% increase in app downloads since last quarter. Digital sales at the Habit now account for 33% of mix. The team is making good progress, growing new sales channels and forming direct relationship with our customers. Moving on to our unrivaled culture and talent growth driver front. As we've mentioned on previous calls, we have been celebrating our 25th anniversary as a publicly-traded company in various forms throughout this year. I'd like to acknowledge the important role our unique people-first culture and world-class talent have played in our success over the last 25 years. Our culture, which is focused on recognition and collaboration, is a key differentiator across our portfolio of iconic brands. It continues to drive retention and recruitment of amazing leaders who are developing others, growing their careers and ensuring the continued strong performance and success of our brand. I'm proud of Yum!'s deep bench of outstanding leaders and how our commitment to growing our people from within has driven a healthy increase in promotions and new opportunities for our teams. Our culture continues to attract top external talent as well. We recently welcomed former Mars Inc. Executive, Allyson Park, to our global leadership team as Yum!'s Chief Corporate Affairs Officer, overseeing communications and public policy as well as our ESG strategy, an area of increased importance as we continue driving our recipe for good. At Pizza Hut, we welcomed former Starbucks executives Shannon Garcia as the brand's Global Chief Operating and Transformation Officer, a role that will evolve the way in which the brand works with its markets to add value and operate with a digital-first mindset. These are just two examples of the incredible talent that our culture enables us to attract from outside and within our industry. When it comes to our Recipe for Good, we continue to invest in critical work that's focused on our three priority areas of people, food and planet. I'm proud of our commitment and the progress we're making on the execution of our ESG jet. For example, when it comes to our climate efforts, we moved Yum!'s US offices as well as all of our company-owned restaurants to renewable electricity. We're now conducting a global study on renewable energy markets to identify low-carbon solutions at our restaurants worldwide. And in August, Pizza Hut US announced an exciting partnership with Dairy Farmers of America on an innovative farm-level sustainability project to provide participating farmers with the technology and data needed to help reduce greenhouse gas emissions. With iconic brands and unmatched scale, I truly believe that we're in a unique position to make a significant impact in the areas we are prioritized. To wrap up, I'm excited about the momentum in the business that we demonstrated this quarter. The power and resilience of our brands was clear as we continue to prove we can perform well in any environment. With our diversified global scale, world-class franchise partners and unmatched operating capabilities, I am more confident than ever in the future success of our business. With that, Chris, over to you.

Operator:

Thank you. We will now start today's Q&A session. [Operator Instructions] Our first question today comes from Dennis Geiger from UBS. Your line is now open.

David Gibbs:

Yes. From a consumer standpoint, obviously, you saw the top line results we reported this quarter. We're very pleased with them. They're very strong. So, generally around the world, we're not seeing any concerns from a consumer standpoint. Then, if you dig deeper into what's going on in the US, it's been well documented that there's a little bit of a K-shaped recovery. And we're seeing a little bit of that. We're higher in consumers having a little bit more demand. But the great thing about our business is our brands are so well positioned to succeed in any environment. And in particular, our business is 80% globally based on Taco Bell US and KFC International. Those two businesses make up 80% of our profit. They're incredibly well positioned to deliver value to consumers and with appealing brands. So in the US, this K-shaped recovery, there's a little bit of K-shaped demand for value on the high end. The demand is more for premium value. That's why you're seeing us do things like the Double Stay Grill Cheese Burrito at Taco Bell, which is at a higher price point than normal, but still a great value and a big part of our success in Taco Bell. And then on the low end, in Q3, KFC go back to Mac and Cheese bowls with some success that moves the needle. So, that's value offering, but at a price point that's appealing to a line consumer, but still not just discounting our core product, something interesting that consumers are [indiscernible]. Cravings menu in Taco Bell, the same thing, where we're offering burrito for $2. As far as the consumer environment for us and our industry and for our brands, which are particularly well suited to navigate, it looks good. Now, I know in other industries like in other parts of retail, if you bought some furniture a couple of years ago, you probably pulled your demand forward and that they're not going to have the same demand today. We don't have that issue in our industry because if you bought lunch two years ago, that's not influencing your decision today. And your decision today is more determined by how we stack up versus your options. We know that we're a really attractive option versus grocery, which is experiencing a lot of inflation. So this is a good environment for us.

Q – John Glass:

Good morning. Chris and David, is 6% unit growth, the new 5%? I guess I'm thinking about durability of that growth rate as you think out and just remind us one, when you think about sort of targets for growth rate, what's the time horizon? Ultimately, the base effect of large numbers catches up with such a large system. So is it a three-year target, five-year? How do you sort of frame that internally? And Chris, can you also just talk about cost of capital, cost of debt has gone up. Is that a worrisome impediment to growth over the immediate term as the rate environment changes? Thanks.

A – Chris Turner:

Yeah. So John, on the capital side, I'll take it in two buckets. One, just following up on David's comments around franchisees and unit development. Just a couple of additional thoughts there as it relates to capital. David mentioned in many of our markets around the globe, we had very strong returns that are significantly higher than interest rates or even with small moves in interest rates. These are still highly attractive investments for our franchisees to make. And keep in mind that our franchisees on average compared to many other systems are larger, more sophisticated, more well-capitalized and more growth-minded. They're able to look through near-term noise in the market and actually take advantage of these types of disruptions in the marketplace to accelerate their growth. And so we're very pleased with the state of our franchisee base and our partnership with our franchisees, plus we have the strongest development team in the business. So we're working with them to navigate through that, but we feel good. In terms of cost of capital, for our balance sheet, our balance sheet at Yum! remained strong and very resilient. I think we proved that as we navigated the last few years. We're proud of the cash that we return to our shareholders. And we're set up well right now in this higher interest rate environment. We have no maturities, as we mentioned earlier, through 2026. 94% of our debt is fixed. We've also, over the last few years, created more capacity in some of the lower cost areas of our capital structure that we could access if needed. Right now, we're at five times leverage. But to be clear, going forward, we're not wedded to five times leverage. We're going to do what optimizes returns for our shareholders. We review our strategy regularly with the Board. So when it comes time, the next time that we would consider issuing debt, we'll look at where rates are at that time, we'll look at a set of other factors, and we'll make a decision on when the issue or whether to grow into a slightly lower leverage ratio. But just know, we're going to do what optimizes returns for our shareholders.

John Ivankoe:

Hi. Thank you. Also a capital question, if I may. Obviously, there's a lot of focus on new unit development as there should be. Clearly, the same-store sales around the world, particularly KFC International really does support underlying franchise system that should. And I'm sure is doing very well. But the question is on the existing base of assets, especially the existing base of assets that might be 10-plus years old. I mean just how the overall system is from a capital perspective, are there any major projects that are happening in some major countries around the world that maybe we just haven't heard about? And does it make sense? Would it make sense for Yum! to co-invest with its franchise system around the world. Obviously, we all see the US, but you have a lot of big countries around the world where maybe putting some capital in the existing base of assets could be something that could drive longer-term brand value and shareholder value as well? Thanks.

Operator:

Our next question comes from Jon Tower from Yum! [ph]. Your line is now open.

Chris Turner:

Yes. So obviously, in Europe, right now, there are some challenges, particularly on energy inflation, they're facing, our franchisees. Europe is an important growth market for us in the long run. We have meaningful but moderate exposure in the context of our global portfolio. Europe as a geography, is about mid-teens percentage of our sales and our operating profit. The business continues to be strong from a top line perspective there. If you look at KFC Europe, we had 25% system sales growth in Q3. Now the UK was a little bit of a different story where those energy inflation is a bit more pronounced, and you've got that holiday overlaps continuing throughout the year. So we had slight negative sales there. Same thing in the Pizza Hut business, strong in other parts, UK a bit more impacted, but we are working closely with our franchisees. We know this is going to be a challenge for them to navigate. And we manage the business on a franchisee-by-franchisee basis. So our teams in Europe are partnering with them setting the commercial plans for the business to help navigate those inflationary challenges.

David Tarantino:

Hi good morning. My question really is about the sales strength you saw for both KFC and Pizza Hut, especially when you factor out China. You saw a pretty material acceleration in the comps relative to pre-COVID levels. So I guess, on a three-year comp basis, a pretty big step-up. And I wonder if you could just talk about what you think drove that step up from the second quarter and how sustainable that trend might be? Thanks.

Operator:

Our next question is from Andrew Charles from Cowen. Please go ahead.

David Gibbs:

Yes. Look, it's hard to predict anything over the last few years in this environment. The one thing that I can predict though, is our brands are incredibly well positioned to navigate any environment. We've demonstrated that over the last few years, and I feel confident as we move forward. Value does seem to be more of a factor today than it might have been six or nine months ago. And that's just more of a return to normal for the industry, rather than it is an exaggerated emphasis on value. But as I mentioned in my earlier comments, the scale that we have, our purchasing ability, the appeal of our brands, the fact that the vast majority of our business is at Taco Bell US and KFC International piece, that are so strong and so successful at navigating that give us great confidence that we will be able to continue to thrive in any environment. And there is a little bit more of an emphasis on this premium value, which is good for the industry where without products that aren't at the absolute lowest price can still be very appealing to consumers as long as the overall equation, the experience, the convenience, the credibility of the food is all there.

Operator:

Our last question today will be from David Palmer from Evercore. Please go ahead.

Chris Turner:

Yes. Thanks, David. On Pizza Hut US first. As David mentioned, the addition of aggregators has been one part of solving the delivery capacity challenge that we mentioned earlier in the year. We talked about how at the beginning of the year, we view this more as a capacity challenge than a demand challenge. And we've used our relationships with the aggregators, both being on their platforms and working with them on delivery as a service as one mode to solve that. Plus, I think we've mentioned that we have also adjusted some of our hiring practices and our HR practices or our franchisees have to attract more drivers into their jobs, things like reducing the time it takes to apply for a job at Pizza Hut. Both of those have contributed to us having significantly more delivery capacity in the market. If you look at Q2, we had a 23-point gap between our carryout growth and our delivery growth. In Q3, we actually extended our carryout growth, but the gap narrowed to 17 points. So that means delivery was significantly higher, and I think that's just attributable to both of those levers, giving us more delivery capacity into the system. There's one other benefit from the aggregator platforms, which is we get an incremental customer, who sees us on those marketplaces. And so that's probably been a bit of an impact there as well. And we've mentioned earlier that we've seen franchisees who adopted these faster run a little bit ahead of the system. So, I think that is part of what's driving growth in the Pizza Hut US system.

Operator:

That concludes today's conference call.

Operator:

Hello, everyone and welcome to the Yum! Brands 2022 Second Quarter Earnings Call. My name is Seb and I will be the operator for your call today. [Operator Instructions] I will now hand the floor over to Jodi Dyer, VP, Investor Relations.

David Gibbs:

Thank you, Jodi and good morning everyone. Our second quarter results are a testament to the resilience of our iconic brands and the power of our highly franchised business in this complex operating environment. System sales grew 5% after adjusting for the exclusion of our Russia business, driven by sustained development momentum. We opened 781 gross new units in the quarter, with broad-based contributions from each of our brands. Additionally, we delivered positive same-store sales growth while lapping last year’s growth of 23%, the strongest quarter of same-store sales growth in Yum!’s history. We are pleased with the continued growth in our digital business with sales of nearly $6 billion fueled by the adoption of our global platforms and capabilities. Our unmatched global scale and digital capabilities are key differentiators in the restaurant industry and these competitive advantages enable us to thrive in any environment. I will now share a few global trends from the quarter. As Yum! China shared on its earnings call last week, COVID-related restrictions continued throughout the quarter, significantly impacting second quarter results. However, trends outside of China, remains strong. Our consolidated same-store sales, excluding China grew 6% for the quarter. Despite a complex consumer landscape in the U.S., Taco Bell U.S. knocked it out of the park with 8% same-store sales growth. The team achieved these results through exceptional execution of a well-balanced marketing agenda that sustained brand buzz, distinctive product news and compelling value offerings and that was all supported by operational improvements and a focus on elevating the digital experience. Additionally, emerging markets, excluding China, continued to recover to pre-COVID levels, driven by the reopening of dining rooms and growth in our digital business. In fact, same-store sales growth for emerging markets, excluding China, was up 22%, a 4 point acceleration from the prior quarter. We remain confident that we are well positioned to win in this environment given our iconic brands that customers love, strong consumer value proposition, scale advantages, expanded digital access and sophisticated franchise partners with unmatched operating capability. Before I provide an update on our growth drivers, I’d like to share an update on our ongoing process to exit Russia. Last month, we shared that we completed the transfer of ownership of our Pizza Hut business in Russia to a local operator who has initiated the process of rebranding locations to a non-Yum! concept. As for our KFC restaurants in Russia, we are in advanced stages of transferring ownership, operating systems and master franchise rights, including the network of franchise restaurants to a local operator who will be responsible for rebranding locations to a non-Yum! concept. Upon the completion of this process, we will have fully exited from Russia. Our franchisees and team members in Ukraine continue to demonstrate incredible fortitude through this conflict. And I am proud to report that nearly all of our stores in Ukraine have reopened to serve the people of Ukraine, while ensuring the safety of our team members. Now, I will talk about two of our growth drivers, our Relevant, Easy and Distinctive brands or RED for short and Unrivaled Culture and Talent. Then I will provide an update on our Recipe for Good. Chris will share the details of our second quarter financial results, including an update on our capital strategy before providing an update on our unmatched operating capabilities and bold restaurant development growth driver. Let me begin with our Relevant, Easy and Distinctive brands. Our KFC division, which accounts for 49% of our operating profit, grew system sales 1% this quarter, driven by 3% unit growth and a 1% decline in same-store sales. Adjusting last year for the exclusion of Russia, KFC division system sales growth was 4%, with 7% unit growth. Continued sales weakness in China contributed to significant year-over-year pressure in the quarter. Excluding China, our same-store sales grew 7%. So China remains difficult to forecast, pressures gradually improved throughout the quarter. However, as Yum! China said last week, given the recurrence of COVID outbreaks, the sales recovery will likely be non-linear and uneven. It’s been well noted that many developed markets experienced increasing macro pressures and headwinds to consumer spending this quarter. In addition, the U.S. and UK markets faced tough compares due to government stimulus last year. While KFC U.S. faced difficult laps from stimulus and the successful launch of the chicken sandwich platform, we are pleased to share that same-store sales growth improved sequentially throughout the quarter. However, the macro pressures were not felt consistently across all developed markets in our portfolio. For example, Australia grew system sales 7% as same-store sales growth doubled from the prior quarter. This strong demand has followed the introduction of modern menu, which highlights our uniquely craveable products and contemporary value offerings. Turning to our emerging markets, which delivered remarkable results in the quarter. I’d like to highlight India, the Middle East and Latin America. In India, where system sales grew 103%, the team continued to advance their digital ecosystem and provide consumers with disruptive value offering. System sales grew 41% in the Middle East driven by accelerating digital sales that grew approximately 70% year-over-year even as dine-in sales continued to recover. The launch of Click & Collect functionalities, including QR code ordering via the KFC app in several of our Middle East markets helped drive these results. The Latin America market achieved 32% system sales growth, propelled by a well-balanced marketing strategy, including a focus on product innovation and dedication to value offerings, while advancing digital capabilities following the launch of the KFC mobile app and kiosks. Our diverse global portfolio is one of the many reasons we have great confidence we are well positioned in the current environment. Turning to our Taco Bell division, which accounts for 36% of our operating profit, system sales grew 10%, driven by 4% unit growth and 8% same-store sales growth. Taco Bell continues to fire on all cylinders as evidenced by the broad-based strength of its second quarter results. For Taco Bell U.S., system sales grew 9%, driven by 8% same-store sales growth and 2% unit growth. Taco Bell remains a culture leader in the industry successfully executing on its strategy to inspire and enable the world to live mass through innovative marketing campaigns, buzz-worthy brand news, distinctive products and strong value offering. Despite significant inflation, Taco Bell maintained restaurant margins by leveraging its pricing power for premium products and craveable LTOs, while still providing consumers with everyday value through a broad range of price points such as those items featured on the Cravings Value Menu. The return of the Mexican pizza as an LTO this quarter is a prime demonstration of these strengths. Taco Bell’s most loyal fans were granted early access, increasing the average loyalty registrations 15x during the 2 days of early access and fueling 10% growth in loyalty members in the quarter. Demand for the Mexican pizza was 7x previous levels, reaching over 20 million pizzas sold nationwide, with some stores selling out within a week, creating a sustained positive halo for the brand. Given the overwhelmingly positive reaction from our customers, we are excited to bring back the Mexican pizza in the fall when it will become a permanent fixture on the venue. At Taco Bell International, system sales grew 31%, owing to 27% unit growth and 9% same-store sales growth. 5 of our 7 European markets saw double-digit same-store sales growth, thanks to the balanced execution of everyday value and disruptive value, while also continuing to grow brand awareness. Taco Bell International is building on its development momentum and now meaningfully contributes to the division’s total unit growth. Moving on to the Pizza Hut division, which accounts for 15% of our operating profit. Q2 system sales were flat, driven by 4% unit growth and a 3% same-store sales decline. At Pizza Hut International, which represents 8% of our operating profit, system sales grew 3%, led by 7% unit growth and a 2% decline in same-store sales. As I mentioned before, COVID lockdowns in China led to sales softness in the quarter. Excluding China, Pizza Hut International same-store sales grew 6%. I’d like to highlight two of our leading markets for the quarter, India and Latin America. India system sales grew 79%, a 35 point acceleration from the prior quarter, driven by further recovery in dine-in sales and home meal replacement strength. System sales grew 18% in the Middle East, where the team has successfully executed a balanced strategy of offering everyday value and customized products, with particular success from the MyBox offering. MyBox offers a compelling entry price point that is well positioned to serve the individual eater and lunch occasion and is now live in nearly 50 markets. At Pizza Hut U.S., which represents 7% of our operating profit, system sales declined 3%, driven by flat unit growth and a 4% decline in same-store sales driven in large part by continued operational challenges in our delivery business. We made progress expanding system-wide adoption of third-party delivery as a service to help address our delivery driver capacity constraints to meet consumer demand. As of the end of Q2, approximately 55% of our U.S. locations have implemented delivery as a service, up from 40% at the beginning of the quarter. Additionally, we are leaning into our aggregator partnerships by joining third-party marketplaces so our consumers can access our craveable food wherever they shop. As of the end of Q2, roughly 70% of eligible stores have opted into using at least one aggregator marketplace, up from approximately 45% at the beginning of Q2. Finally, the team shifted promotional focus towards compelling value to address the needs of the consumer. Lastly, the Habit Burger Grill grew system sales 10%, driven by 15% unit growth and 4% same-store sales decline. During National Burger month, Habit provided exclusive offers through its mobile app, resulting in a 10% increase in mobile app installed, while also highlighting its culinary inspired innovation, which included the spicy green beans a spicy twist on its signature, Tempura Batter green beans. Moving on to our Unrivaled Culture and Talent growth driver. We continued to see growth of our unrivaled talent with Tarun Lal being named President of KFC U.S. and Shannon Hennessy taking on a new role as President of the Habit Burger Grill. Tarun is a prime example of growth from within joining our organization 25 years ago and serving in various leadership positions. He is not only a best-in-class operator known for driving breakthrough results. He is also a driver of our culture. I am confident Tarun’s leadership and winning partnership mindset with our franchisees will be an asset as we drive the next chapter of growth for the KFC U.S. business. Shannon joined Yum! a few years ago as a KFC Global CFO and immediately hit the ground running. She has a unique ability to work across functions and bring people together and solve problems, drive change and deliver meaningful results for our business. She is also a standout culture leader with a commitment to growing talent and to advancing equity inclusion and belonging. When it comes to our recipe for good, we recently published our Annual Global Citizenship and Sustainability Report, which highlights our strategic investments in socially responsible growth and stewardship of our people, food and impact on the planet. The report includes updates on our key commitments, including our social purpose and how we have awarded more than $50 million in grants to nearly 30 social impact programs globally. This is accomplished through Yum!’s unlocking opportunity initiative, the Champions equity and inclusion, education and entrepreneurship for frontline restaurant teams and communities around the world. It reinforces our industry leading commitment to food safety as well as our efforts to respond to customers’ evolving preferences and improve the nutritional value of our menu items. Finally, the report also highlights our environmental commitments, including our science-based targets to reduce greenhouse gas emissions nearly 50% by 2030 as well as a newly harmonized packaging policy across our brands that commits to moving all consumer-facing plastic packaging to be reusable, recyclable or compostable by 2025. To wrap up, our performance continues to demonstrate the power of our unmatched global scale in a challenging operating environment, thanks to the advantages of our unrivaled talent, global development capabilities and expanding technology platforms and capabilities, our iconic brands continue to drive consistent growth. Our best-in-class teams and franchise partners are committed to serving up the most loved, trusted and fastest growing restaurant brands in the world. With that Chris, over to you.

Operator:

Our first question comes from David Tarantino from Baird. David, please go ahead.

David Gibbs:

Sure. Thank you, David. I commented on the last earnings call, and I think it remains true today. This is truly one of the most complex environments we’ve ever seen in our industry to operate in because we’re not just dealing with economic issues like inflation and lapping stimulus and things like that, but also the social issues of people returning to mobility, they have to lock down, working from home and just the change in consumer patterns just to mention a few. So against that incredibly complex backdrop, I think these issues play out differently in each market. So it’s very hard to talk about generalities with the consumer. But one generality we’re seeing internationally is really the emerging market consumer is returning. We mentioned the 22% increase ex China in our emerging markets. Obviously, that’s a flip from early in the pandemic when those markets were hit hard. We like that tailwind in our business, and I think that that’s going to help lift us as we go and developed markets are fairly stable on overall performance as well. But in terms of the global consumer, we do think they are getting more cautious. We are leaning more in on value offerings all around the world and that also is playing out in the United States. If you look at the U.S., I think what’s happened over the last quarter is this the low-income consumer pulling back has become more pronounced. We’ve seen that in our business and we’re reacting accordingly. So we know the formula to win in any environment for us is to have a lot of brand buzz, to have product news and to have great value. You got to – you can’t pick one of those things, you got to deliver on all three. So when you ask how we’re planning, that’s how we’re planning and making sure in particular that we have the value offerings. Taco Bell is a great example of it this quarter when they obviously had a great brand buzz with the Mexican Pizza LTO, and that was also a great product news. But not to be left behind you, they did a great job on value with the cravings menu and the $2 Burrito offerings. All of that added up to a blowout quarter for Taco Bell, obviously. And we think we can win and thrive in any environment. So the changes in consumer behavior are really going to get us off our game. If we stick to our formula, we know we can win.

Operator:

Our next question comes from Sara Senatore from Bank of America. Please go ahead.

Chris Turner:

Yes. Thanks, Sara. Our digital strategy continues to work. We like just about everything about those nearly $6 billion in digital sales. And we continue to progress, the nearly $6 billion even came after removing the Russia sales. Russia had a strong digital market. So it gives you a sense that our digital business continues to thrive. The 40% digital mix tells you that the customers are seeing the value and the easy experiences that we’re providing. So even as they are starting to come back to the dining rooms more and more, they are continuing to interact with us in a digital manner. And then you touched on the operational benefits, which is really part of our easy operations plan in our digital strategy and how technologies like Dragontail are helping us to operate better. Dragontail, we mentioned continues to expand. Our franchisees continue to adopt Dragontail in a number of markets. We are now up to 28 markets north of 3,300 stores that employ Dragontail. Whenever we implement, we see a significant improvement in customer experience. And you hit on the exact – one of the exact places where we see that benefit is coordinating those delivery orders and ensuring that we have a fresh product coming right on the oven or the prior because we are now in three KFC markets right at the time when the delivery driver gets to the restaurant. That’s what helps us to get a fresher hotter product to the customer. So, there are other benefits of Dragontail as well. You see that it helps to communicate the team members in the back of house when we are reaching a peak period in the restaurant, for example, and they can move into different operating modes to respond to that. We have been doing lots of piloting in additional markets including here in the U.S., and we are going to continue to push Dragontail. Of course, that also speaks to the fact that our franchisees see the value in it. They only implement this when they see the value of working in their stores and in their restaurants. So, we continue to be very confident in our digital strategy and continue to invest, but believe we are getting a high return on that investment.

Operator:

Our next question is from David Palmer from Evercore ISI. Please go ahead.

David Gibbs:

Thanks David. Yes, obviously, we had a difficult lap in the U.S. in Q2 basically lapping stimulus. KFC was also lapping the launch of the chicken sandwich. I think we did comment in the prepared remarks that the cadence during the quarter for KFC got better as the quarter evolved. And then at the end of the quarter, they launched Mac & Cheese Bowls to more directly address the value issue I talked about earlier. Same thing with Pizza Hut as the quarter went on. They introduced a $6.99 deal. Both of those have launched well. And look, it’s hard to predict anything, but I tend to agree with your statement that we are probably pass peak inflation and obviously, the lap that we had in the quarter was one of the most difficult we have ever had at Yum!. We were lapping a plus 23% on a global basis. So, the fact that we came out of that quarter with positive sales was really encouraging.

Operator:

Our next question is from Andrew Charles from Cowen. Please go ahead.

David Gibbs:

Look, appreciate – I think the development piece, we have been talking about a lot. And obviously, we just continue to put up great numbers on the development front. One of the things I am really encouraged about in the quarter and really for the year is, first of all, we are up year-over-year on net new unit openings for the first half of the year. We are also up in terms of the mix of where those openings are coming from with more development coming from outside of China, which has historically, obviously been our biggest developer. So, the development is becoming more widespread, to answer your question about what do we need to see to think about raising guidance. We want to see a continuation of that trend, continuation of building the pipeline for future years. But certainly, development, a real highlight of the quarter, it was widespread in terms of a number of countries. And we are also seeing the Pizza Hut and Taco Bell start to play a bigger role in our development formula as well as have it down the road. So, we think we are going to have even more diversity in our development as we move forward. We are obviously cautious in this environment though as we have learned over the last 2.5 years in terms of what it means for our business. So, at the appropriate time, we will relook at our guidance. Obviously, the other impressive thing for the quarter is not only did we lose the Russia units that are in our unit count, but we also lost the planned development for Russia, which I don’t think people think about. We were supposed to open over 100 units this quarter. But yet, we are still sticking with being able to hit our range and being inside of hitting the range of 4% to 5% unit growth despite all of those enormous headwinds.

Operator:

Our next question is from John Glass from Morgan Stanley. Please go ahead.

David Gibbs:

Sure. Thanks John. I mentioned this earlier, but really, the benefit of things like the Mexican pizza is the connection it has with consumers the love they have for the product and the halo it provides to the brand. It’s just as much about the buzz that, that creates and the relevance it creates for our brand as it is about the discrete amount of sales that we had during the weaker or that we have the product in store. And I think that is really our formula. We have got to be the most relevant brands in the industry and connecting with consumers the way Taco Bell has done in Q2. And you can see the results when that happens. So, to answer your question, it really wasn’t about the exact sales during that period of time, contributing to the quarter as much as it was just how relevant and connected to pop culture and our consumers Taco Bell is the way they brought the mix compete back, the way they marketed it. But certainly, there is a love for the product, and we know when we introduced it in the fall that we will get actual discrete sales benefit that might translate into a couple of points of sales.

Operator:

Our next question is from Jon Tower at Citi. Please go ahead.

Chris Turner:

Yes. Thanks Jon. I will take first, the expansion of the delivery partnerships. As we said in Q1, we saw a similar dynamic in Q2 where we believe we have got not as much of a demand problem. Demand remains strong. Our carryout business was up strongly, but we saw declines again in the delivery business. And so that’s what we are focused on addressing it, the availability of drivers to deliver the product whenever a customer wants to order through that channel. We talked about last quarter, we were starting to implement changes. Some of those are internal where we are changing things like our hiring practices to make a faster hiring process because that’s what folks who are in the market for driving jobs look for. But we also talked about how the partnerships with aggregators can help us as well. So, if you think about the 55% where we ended the quarter on delivery as a service, that was an expansion throughout the quarter. The 70% on marketplaces. That number represents 70% who were on at least one marketplace. We only have about 35% who are on multiple marketplaces. So, we still got further to go on implementing marketplaces across the business. But if we look at the franchisees who have been implemented both of those they are running mid-single digits ahead of those who haven’t. So, we are continuing to see an impact here from reaching incremental customers and from giving us that delivery capacity that we need to serve that channel. On the $6.99 promotion, really what that reflects, going back to David’s point on the state of the consumer in the U.S., we know we have got to have value options and more full range pricing on the menu. And this was a move by the team to give that value to the customers who needed it and to just give us a little bit more breadth and range on menu prices. So, we still have great craveable products that they can trade up to, but we also want to have value there for the customers who are looking for it.

Operator:

Thank you. Our next question comes from Dennis Geiger, UBS. Dennis, please go ahead.

David Gibbs:

Yes. Obviously, we are excited about the growth in international and the future for our international business. In particular, Taco Bell, you saw they put up over 30% system sales growth. The development machine at Taco Bell is really hitting on all cylinders internationally. And we are proving that with focused effort, the right team against, Julie Masino and her team are doing an amazing job, the right franchise partners that we can get to scale that needs Taco Bell international markets, and they can be massive growth drivers for Yum!. We should get to the end of the year with over four markets at the 100-plus unit count, which that’s what we know to be the tipping point for really accelerated growth down the road. But in general, international is really a tale of a lot of different stories. And you are seeing that best exemplified by – China is still in lockdown, and we are – it’s hard to sell product when you have a lot of the market locked down. But as I have mentioned earlier, the exciting thing is that we have got – 20% of our business is in emerging markets like China. That business is on fire. As we anticipated, it’s recovering from COVID and lockdowns with increased mobility and new capabilities on the digital front that Chris talked about. And that’s really driving our business there, and that should be a growth driver. And we should see the same thing play out in China down the road. All the while our developed markets remaining stable and growing and even coming off of tough laps as they were doing better in the previous years. So, I think it all sets up to be a nice growth driver for Yum! for many years to come. Yes. And so with that, I am going to just close the call, thanking everybody for their time. Obviously, reiterating it was a strong quarter despite all these well-documented headwinds. If there is ever a quarter to demonstrate how resilient Yum! is and our business model is stronger than ever, this is this. The same themes continued from previous quarters with digital and development, both being really strong and those teams are doing an amazing job. We have got this emerging market tailwind now that I just talked about. And then Taco Bell, one of the things we didn’t mention is they grew sales. They delivered 26% margins, and they did it with essentially flat trend. So, all that pricing that they took, clearly still value for consumers, which bodes well for the future, up 20% versus pre-pandemic, up 20% at Taco Bell on a 3-year basis. So, when you got 26% margins and you are up 20%, you got a lot of happy franchisees and once again, amazing resilient business. This quarter demonstrates we can thrive in any environment. Thanks, everybody, for your time today.

Operator:

Welcome to the Q1 2022 Yum! Brands Earnings Conference Call. My name is Ruby, and I will be your moderator for today's call. [Operator Instructions] I will now hand over to our host, Jodi Dyer, VP of Investor Relations, to begin.

David Gibbs:

Thank you, Jodi, and good morning, everyone. Before I go over our first quarter results, I'd like to begin by sharing an update on our business in Russia and Ukraine. As a company that puts people first in every decision, I'm incredibly proud that we have made the safety and well-being of all those impacted by the tragedy in Ukraine as the top priority. I want to personally thank our many dedicated team members and franchisees working hard to navigate through this deadly conflict and manage our business in the most complex and challenging geopolitical environment in recent history. I'm proud of how our people in the surrounding regions have banded together and are doing everything possible to support impacted Ukrainian refugees, team members and franchisees, some of whom have overcome incredible challenges and have reopened a number of stores to serve food in communities where it is safe. Additionally, the Yum! Brands Foundation made a donation to the Red Cross to support those affected by the crisis. We activated the Yum! Disaster Relief Fund to support Ukrainian franchise employees and are matching employee donations to organizations providing relief in Ukraine, including UNICEF, the Red Cross, the World Food Programme and the International Rescue Committee. We previously announced the suspension of all investment and restaurant development efforts in Russia as well as operations of company-owned KFC restaurants and that we are finalizing an agreement with our Pizza Hut master franchisee to suspend all restaurant operations. In addition to these actions, we have begun a process aimed at transferring ownership to local operators while, in the interim, we continue to redirect any profits from Russia operations to humanitarian aid. This is not a decision we take lightly and I know that it will be a complicated process to execute these transactions. We will update you on this process during our second quarter earnings call. Chris will provide more details around the financial impact from Russia on the quarter. I'll now discuss our first quarter results, which illustrate the resiliency of our highly franchised diversified growth model. Our first quarter system sales growth of 8%, driven by both unit development and same-store sales growth, is a testament to our iconic brands and the unmatched operating capabilities of our world-class franchise partners. We set a first quarter development record, opening nearly 1,000 gross units, supported by positive unit growth at each of our brands. Our continued same-store sales momentum was fueled by our brands executing our Recipe for Growth strategy by providing relevant value, access via new channels, distinctive products and a strong brand voice, all supported by our digital and delivery capabilities. Our digital channels continue to accelerate with digital sales of approximately $6 billion, a new first quarter record, reflecting an increase of 15% year-over-year. Importantly, we set a new digital mix record, now exceeding 40%. In this complex and highly inflationary operating environment, we and our franchisees remain focused on maintaining long-term profitability by leveraging our scale and strategic pricing actions while still offering our customers convenience and value. The many competitive advantages of our unrivaled talent, our sophisticated franchise system and the power of our business model give me great confidence that we are well prepared to navigate these complexities and deliver robust global growth. Let me share a few global trends from the quarter. As Yum China shared on its first quarter earnings call last night, COVID-related lockdowns impacted restaurant operations and depressed sales in that market, temporarily delaying an eventual recovery. However, our results outside of China remains strong. In fact, excluding China, both our KFC Division and Pizza Hut International same-store sales were up 10%, which would result in consolidated Yum! same-store sales excluding China of 6% for the quarter. We're pleased with the continued momentum in our developed markets as they lap strong results from last year and we're excited about the continued resurgence of emerging markets, with same-store sales excluding China of positive 18% for the quarter. We continue to be encouraged by the global consumer recovery underpinned by returning consumer mobility, creating a tailwind for our on-premise dining while we sustain our off-premise business. Next, I'll discuss two of the four Recipe for Growth drivers

Operator:

[Operator Instructions] Our first question is from Dennis Geiger of UBS.

David Gibbs:

Yes, sure. Thanks for the question, Dennis. Just as far as the consumer, I would say that the U.S. demand is generally strong. But this is a really complex environment. I know a lot of people talked about the K-shaped recovery and bifurcated with higher income consumers in better shape than lower income. I think that's true but I think that's probably a little bit of an oversimplification. I don't know in my career if we've seen a more complex environment to analyze consumer behavior than what we're dealing with right now. From an economic standpoint, you've got inflation, rising wages. You've got the funkiness of the stimulus lap -- that we're lapping from last year. But you've also got all these societal issues, like mobility coming out of COVID, consumer reaction to war in Eastern Europe, working from home, changing consumer patterns. All of this makes for a pretty complex environment to figure out how to analyze it and market to consumers. And that's a great part about Yum!. We've got the scale and the talent to do that better than we think anybody else in the industry and navigate that complexity with our internal divisions like Collider, which is an expert on consumer behavior; Kvantum helping us figure out how to navigate the immediate landscape to market to those consumers; and all of our marketing and talent -- marketing talented leaders in the U.S. and around the world. So complex environment, but as usual, convenience and value matters in this environment. And we believe we're leaders across our brands in that regard. You're seeing that result really in all the brands in Q1 in the U.S. The challenge obviously at Pizza Hut was less of sales performance, it's simply just due to demand -- the demand is there but simply due to our ability to meet that demand with drivers. This has been documented by others. But generally, as you mentioned, resiliency is a key feature of our brands. And going forward, we actually feel really good about our ability to navigate this environment and continue to prosper.

John Glass:

Chris, just inside your new mid-single-digit core operating profit ex -- with the impact of Russia, what are you assuming China does in that? I suspect that's another pivotal piece. What gives you confidence in that reacceleration in the back half? I understand comparisons are easier. And just when you look at that guidance, 6% unit growth is above that long-term reset target. Is that a realistic view for this year? Or was the first quarter just unusually good and that's not necessarily the right run rate?

Operator:

Our next question is from Jon Tower of Citi.

David Gibbs:

Thanks, Jon. I'll take the first question. Chris will comment on Pizza Hut. As far as unit development, obviously, we're very proud of the progress that we've made. And yes, we have actually introduced some new incentives company-wide around development. We thought it was important to just unite ourselves and our franchise partners to take advantage of, frankly, an environment that's really favorable to us. Our brands have gotten stronger over the last two years in general. Our business model is stronger. And there are really great opportunities to expand our footprint in a lot of economies around the world where there have been some discounts to available real estate. And you're seeing all of that come together through the use of incentives with our team and with - in some cases, in franchise markets. And that's all leading to an increase in the pace of development that we're proud of. And as Chris mentioned, we have visibility into the pipeline and believe it will continue.

Operator:

Our next question is from David Palmer of Evercore.

Chris Turner:

Yes, yes, running 4 or 5 points ahead of the system. And the vast majority of that we attribute to the incremental customers that they're finding through the platform.

Chris Turner:

Well, in terms of the strategy to address these challenges, David Graves and Aaron Powell, who are doing a great job dealing with this very dynamic environment, those are a couple of key parts of their strategy for dealing with this. And we'll be implementing the delivery as a service, as we mentioned in the earlier comments, over the next two to three quarters. And then, of course, the franchisees each have a decision on how to work with aggregators but we do that under our umbrella agreement. And we expect that those kinds of gains continue to show up in the results. Obviously, I think more and more are going to be choosing to move in that direction. So the implementation will take a while but it's certainly part of the strategy for dealing with this really dynamic environment.

Chris Turner:

It's still too early to tell. This is something that has just been implemented over the last few months, so still too early and still too limited a sample size, I think, to draw conclusions on a broad basis. But as we said, if you look at our business, there is this fulfillment challenge. Our carryout business was actually up in the quarter. So the primary challenge was on the delivery business. And so these strategies are directly pointed at that biggest root cause that's getting in the way of being able to serve and fulfill full customer demand.

John Ivankoe:

I did want to revisit some of the comments on economics which is -- clearly, I mean, these brands have been around long enough in the U.S. and globally that, I guess, there are enough maybe previous experiences that we can maybe pick and choose from historically. So in environments where consumers' costs have risen faster than their incomes and obviously, there are so many costs that are rising for the consumer, where does the consumer or where might the consumer typically cut back? Is it in visitation? Or is it in ticket? And I guess this is kind of the first point. Secondly, if it is ticket, when you guys look back '22 versus '19, how much of that average ticket gain do you think was actually frothy, the consumer that maybe traded up or added on or larger sizes, what have you, to unsustainable levels versus how much average ticket do you think may naturally come out of the business as the consumers still use the QSR brands for all the obvious reasons but can just find back ways that you'd basically revert to the mean in terms of what they actually buy and how they use the various brands?

John Ivankoe:

And if it's appropriate to comment, is there any near-term change just in the last month or two from consumers that are closest -- geographically closest to the crisis in Russia and Ukraine? Obviously thinking about some of the Central, Western or -- European markets in terms of how that consumer may have reacted due to some of these terrible events.

Operator:

Our next question is from David Tarantino of Baird.

Chris Turner:

Yes. Thanks, David. As with all elements of our algorithm, we're always working to find ways to overdeliver. We called out the one primary driver which, on profit, creates a headwind this year which -- going into Q2, Q3, Q4, we're going to lose 3 points of operating profit plus the planned growth in Russia as we exclude those from the results and direct any profits from Russia towards humanitarian efforts. So that's the big headwind, of course. In the early going, as we said, this China softness is probably a little bigger than expected. I don't know the long-term trajectory there. You would think at some point in the long term, China will rebound and that business should see growth. But I'm sure the timing on that is uncertain. If you think about other puts and takes, I think emerging market strength. If you look at our 18% same-store sales growth in emerging markets, that's a great sign of recovery and a big important part of our business. So that's a place where you might see upside. Of course, on the flip side, we'll continue to navigate the really dynamic environment around inflation, pricing and how those are playing out in each of our markets around the globe. Right now, we think we're dealing with those incredibly well. Our scale gives us advantage and gives our franchisees advantage in dealing with those. But -- a very dynamic environment but we feel really good about the overall profit engine of the business.

Brian Mullan:

Just kind of a big picture question but do you see any potential one day for a cross-brand loyalty program at Yum!? Is that something that you think could potentially work in the quick service restaurant industry in the U.S.? Or conversely, are there some reasons why that wouldn't work or wouldn't be a good idea maybe from a consumer perspective or a franchisee perspective?

David Gibbs:

So thank you, everybody. I appreciate your time. Just to wrap up, it was another strong quarter obviously with good top line sales growth, all brands growing. The development numbers, obviously, we continue to set records which we're very proud of. And that's widespread, right? All of our brands grew at least 5% on a net new unit basis in the quarter. Another digital sales record which we keep saying on every call and we just keep on delivering on. And then this time, we passed that important milestone of 40% digital mix. And I just think, in total, the quarter represents our brands all around the world are healthy and can perform in any environment. This is certainly one of the most challenging ones we've ever had to deal with, proving the resiliency of our business model. Thank you for your time.

Operator:

Good morning and welcome to the Fourth Quarter 2021 Yum! Brands, Inc. Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jodi Dyer, Vice President, Investor Relations. Please go ahead.

David Gibbs:

Thank you, Jodi and good morning, everyone. As we reflect on 2021, I couldn't be prouder of the collective accomplishments of our world-class franchise partners and collaboration of our global teams, guided by our Recipe for Growth and Good. While the last two years have been the most challenging operating environment we've ever navigated, we exit 2021 stronger than ever with over 53,000 global restaurants. Compared to 2019, we've nearly doubled our digital business. System sales have grown over $5.5 billion and operating profit has grown over $200 million. Additionally, since 2019, we've added another iconic brand and closed on three technology acquisitions, all while launching our global Unlocking Opportunity Initiative with a $100 million commitment over five years investing in equity and inclusion, education and entrepreneurship, the cornerstones of our Recipe for Good. In 2021, we opened 3,057 net new units, driven by 4,180 gross unit openings, with meaningful contributions from each of our brands, marking the strongest growth year in our history and setting an industry record for unit development. To put that into context, as the world's largest restaurant company, we opened a new restaurant on average every two hours. This speaks to the health of our business; iconic brands; capable, committed and well-capitalized franchise partners; and strong unit economics. This is yet another significant development milestone on our ongoing growth journey, providing customers with access to our brands through a variety of restaurant formats and on- and off-premise ordering channels. Now more than ever, we've leaned into the structural advantages of our diversified global portfolio by leveraging our unmatched global scale, sophisticated supply chains, marketing and consumer insights expertise and our growing digital and technology capabilities to fuel growth and deliver strong results. Even as dining room sales recovered throughout the year, we continued to grow our digital sales that reached a record $22 billion in fiscal 2021, an increase of approximately 25% over 2020, suggesting a more permanent shift to digital channels. We ended the year with over 45,000 restaurants offering delivery, representing more than a 25% increase year-over-year. We galvanized our digital and technology strategy and accelerated the development of our ecosystem with both internal investments and the closing of the Kvantum, Tictuk and Dragontail acquisitions. Our teams remain focused on elevating the customer experience, expanding our off-premise capabilities and empowering our team members with tools to make it easier to run our restaurants, all ultimately fueling improved unit economics. Expectations of our customers, team members and franchisees have forever changed due to the experiences over the past two years and we continue to challenge ourselves to exceed their rising bar. I'm confident we're poised to lead the industry as we embark on the next chapter of our growth journey. Today, I'll discuss our 2021 results showcasing a few examples across our brands for two of the four pillars in our Recipe for Growth

Operator:

[Operator Instructions] The first question comes from David Tarantino with Baird. Please go ahead.

Chris Turner:

Yes. Thanks, David. I think we view all of our brands as having strong momentum coming out of 2021. Our long-term growth algorithm is just that, it is our long-term algorithm and we feel confident in delivering it in 2022 and beyond. You do have lots of puts and takes around the globe in terms of lapse, in terms of where Omicron is in any of our given markets but we feel good about the momentum that each of our brands have. And so we're always going to strive to deliver the algorithm and find ways to beat it. And so that's going to be our aspiration but the long-term algorithm sort of defines the plan.

JaredGarber:

Hi, thanks for taking the question. Actually, somewhat of a follow-up to the prior question just on the comp algorithm as we look to next year. It looks like in today's results, the average weekly sales growth across the brands didn't exactly line up with sort of the comp growth so there was some noise in between those numbers. And I wonder if that maybe is what's driving potentially some of that -- what David said as some conservatism in the comp algo. So I just wanted to understand maybe if there's any specific drivers there, if it's just lapse on a year-over-year basis in some of these markets or if it's maybe lower productivity units that are being opened. Any color there would be really helpful.

Operator:

The next question comes from Sara Senatore with Bank of America. Please go ahead.

Chris Turner:

Yes. So first, if I take the drivers of the $22 billion in digital sales, it's been broad-based. We've seen strength across all of our brands and we're seeing strength across all of the channels. So delivery has continued to grow. Carryout has grown over the two years where people are using click and collect. And of course, as people have come back to the dining rooms, we've seen growth in the kiosk business which has rebounded at Taco Bell, for example. So we're seeing strong growth across all of those channels. And of course, on a brand-by-brand basis, you've got real strength in each one. KFC, if you go ex-China, was up 46%. Taco Bell in the U.S. is approaching 20%, Taco Bell International with a 40% mix. And of course, Pizza Hut is sustaining their strength on digital. So it's just a really great story. Clearly, those strong digital numbers come as a result of the investments we've been making and our strategy around digital because we knew this was the future of the industry. As we've said before, COVID accelerated those trends and we're glad that we were in a great position to be able to capitalize on it. But whenever you nearly double your digital sales in two years, I think that's evidence that those investments are paying off. And of course, our franchisees are co-investing with us to help make that happen but they're doing that because they're seeing strong returns from those investments in their business as well. So, I think overall story is we're getting a strong return and we're very pleased with the digital results and we're going to continue to drive that.

DennisGeiger:

Great. Thanks for the question. Wondering if you could talk a bit more about some of the industry challenges in the current environment, even as you're managing them well, what you're seeing globally but particularly in the U.S. across staffing, impacts on operations and sales. And I guess more importantly, how do you think over the coming quarters and going forward as some of these industry challenges ease and the headwinds potentially turn to some tailwinds for the business as it relates to hours, et cetera?

Operator:

The next question comes from David Palmer with Evercore ISI. Please go ahead.

David Gibbs:

Glad you talked about the new unit development, David. For me, it's an amazing accomplishment at Yum!. In my 32 years in this business, I've never seen anything like it obviously. The growth rates are industry records, Yum! records. It was widespread. It's across all brands. It's occurring in the vast majority of our countries which is really encouraging. And the question about where do we see softness going forward, it's a great question. I can tell you that there's no countries that we're worried about pulling back on development. We see all of our countries that are developing today being able to continue to develop at the pace that they're at and even accelerate. India is one I would highlight. We opened 335 units in the country of India on the strength of some development agreements with really great partners across all of our brands. Obviously, there's a huge opportunity for Yum! in India and one that should be accelerating. But even in the U.S., we're starting to see the momentum develop in our Pizza Hut and KFC businesses, who historically haven't been contributing net new unit growth. We're optimistic about that. And Taco Bell U.S. is back to developing at a really fast pace like in the early days of Taco Bell and we see that accelerate. But Taco Bell International is probably one of the most exciting stories we have right now. We've talked about it a lot and you're seeing over 160 net new units built on a base of 600 entering the year. That's a 26% growth. That's pretty impressive and we see that accelerating. Spain, for example, passed 100 units on the ground. We know when you get to that 100-unit tipping point, you see an acceleration but we have other markets poised to do the same.

JohnIvankoe:

Hi, thank you. And I apologize if I missed this. Have you gone back and looked at the fourth quarter system sales and determined how much the labor environment may have actually constrained system-wide sales growth, whether that's in the U.S. or global, it's up to you how we talk about that, just in terms of having less hours in the store that -- the store than you would have -- labor hours in the store than you would have liked? Are you actually having less store hours than you would have like, perhaps even day-parts in certain cases than you would have liked, I guess, is the first part of the question. And then secondly, we talked about easy operations and you mentioned a few things that you were doing at the store to help your franchisees. Are any at the point now where stores can be more efficient from a labor perspective where they can do the same or even more customer counts on a reduced level of labor? Or might that come from future initiatives that you are working on?

Jodi Dyer:

Operator, we have time for one question.

JohnGlass:

Thanks. Good morning. I wanted to ask about KFC International. I was struck by how strong the comps were on a one and two year basis despite the fact that China was down 12%. David, I know you commented earlier about some of those key markets but just maybe unpack that a little bit in terms of what offset that decline in China which is an incredibly important market for KFC. And if you're willing to talk about how you think about the China recovery in your plans for '22 just broadly. Is it a recovery story? And is that embedded in your plans or not?

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning. And welcome to the Third Quarter 2021 Yum Brands earnings conference call. All participants will be in listen-only mode. Should you need assistance, [Operator Instruction]. After today's presentation, there will be an opportunity to ask questions. [Operator Instruction] Please limit yourself to when we 1 question. Please note this event is being recorded. I would now like to turn the conference over to Jodi Dyer, Vice President Investor Relations and CFO digital and technology. Please go ahead

David Gibbs:

Thank you Jodi and good morning, everyone. I'm pleased to share our strong third quarter results, underpinned by record-breaking unit development, continued strong digital sales, and the adaptability of our brands to meet the needs of our consumers in an ever-changing environment. During the third quarter, we delivered 5% same-store sales growth, or 3% same-store sales growth on a year basis. Despite a challenging operating environment due to the ongoing COVID pandemic, I'm extremely proud that we opened 760 net new units. A Q3 record with broad-based strength across our portfolio. While Yum China continues to be a leader in development, we opened 379 net new units across the rest of our portfolio, roughly equivalent to our Q3 2019 global net new units, including China. Our continued positive development momentum this quarter is a testament to the strength of our iconic brands fueled by a strong unit economics and a healthy, well-capitalized franchise system primed for sustained growth. Now will discuss our Q3 results and 2 of the 4 growth drivers that underpin our recipe for growth. Our relevant, easy, and distinctive brands for red, for short, and our unrivaled culture and talent. I will also share an update on our ESG agenda, which we call our recipe for good. Then Chris (ph), will talk about our other 2 growth drivers. Our unmatched operating capability and bold restaurant development in addition to providing more details on our third quarter financial performance and our strong Balance Sheet and liquidity position. First a few highlights from the quarter. Overall young third quarter systems sales grew 8% led by same-store sales growth of 5% on a two-year basis, same-store sales grew 3%, which includes the impact of around 500 stores or 1% temporarily closed due to COVID as of the end of Q3. COVID restrictions that limited mobility in a few markets primarily in Asia, had a significant impact on sales. However, our sales momentum remain strong as evidenced by the fact that our global two-year same-store sales growth excluding Asia, accelerated since last quarter. Sales strength continued in many developed markets, including the U.S. U.K and Canada, with significant recoveries seen across Europe as restrictions is throughout the quarter. We've also seen pockets of strength in our portfolio of emerging markets, including the Middle East, Latin America, Africa, and India, to name a few. As we've previously shared, looking across the more than 150 countries in which we operate, our recovery will neither be consistent from country to country, nor linear within a country reinforcing the competitive advantages of our diversified portfolio and our ability to serve customers through multiple on and off premise channels. A key growth driver for our business remains the continued acceleration of our digital and technology strategy, including how we leverage our global scale with technology investments to enhance the customer and employee experience, strength in restaurants unit economics, and provide a competitive advantage for our franchisees. We're seeing strong and sustained momentum through our digital and off-premise channels across our global business, even as customers return to our dining rooms. We posted over 5 billion in global digital sales with a near 40% digital mix during Q3. We continued to expand delivery capabilities across the globe, setting a record this quarter with over 41,000 stores offering delivery to our customers. Most recently, we acquired dragging tails systems, which will allow us to tap into the powers of artificial intelligence to streamline the end-to-end food preparation process and further enhance our delivery capabilities. Where we've deployed Dragontails cutting edge technology, we found that it makes it easier for team members to operate and run a restaurant and helps our franchisee strengthen store operations, all resulting in a better customer experience. This is the perfect segue way to talk about our 4 RED [Indiscernible]. Starting with the KFC Division, which accounts for 52% of our operating profit, Q3 system sales grew 11% driven by a 6% same-store sales growth, and 7% unit growth. On a 2 year basis, Q3 same-store sales were up 1%, which included the impact of 1% of the stores being temporarily closed due to COVID. At KFC International same-store sales grew 6% during the quarter. Same-store sales declined 1% on the 2-year basis. As previously mentioned, increased COVID case counts and limited mobility to a few key Asian markets, pressured top-line trends in the quarter. This quarter, several Western European markets joined the group of resilient market leading the recovery where sales have fully recovered to pre -COVID levels. Strong digital and off-premise growth, newsworthy products, and doubling down on value offerings have fueled top-line growth in these markets, coupled with the continued strength of the Chicken category across the QSR segment goal. Next at KFC U.S. same-store sales grew 4% during the quarter while same-store sales increased 13% on a two-year basis. The continued success of our chicken sandwich and the strength of the group vacation remains significant drivers of our same-store sales growth. Additionally as of July, our year-to-date digital sales in the U.S. surpassed our full-year 2020 digital sales, which speaks to the results we're seeing from our investments in this critical growth channel. Now onto the Pizza Hut Division, which accounts for 17% of our operating profit. Q3 system sales grew 4% driven by 1% unit growth and 4% same-store sales growth For the division, 2 year same-store sales grew 1% during the quarter, which included the impact of 1% of stores being temporarily closed as of the end of Q3, 2021. Pizza Hut international, same-store sales grew 6% during the quarter. On a 2-year basis, same-store sales declined 4% while our Pizza international business continues to be pressured given our substantial value index that sustained strength in our off-premise business, as reflected by 21% same-store sales growth on a 2-year basis bodes well for the future of the brand and continues to fuel franchisee interest in investing in assets focused on serving the all-premise occasion. Our markets continued to demonstrate what it means to be read by focusing on strong value propositions and innovative partnerships, including Beyond Meat product offerings in 2 markets this quarter. At pizza in U.S., we continued to see positive momentum with 2% same-store sales growth. On a 2-year basis, same-store sales grew 8%, and the off-premise channel grew 17%. Pizza Hut continues to delight customers by bringing only from Pizza Hut premium innovation with the launch of the Edge Pizza and the return of the successful Detroit Style Pizza in Q3. Additionally, we promoted the big dinner box during back-to-school season for operating easy dinner solution for our Pizza Hut customers. Moving onto Taco Bell, which accounts for 31% of our operating profit, third quarter system sales grew 8%, driven by 3% unit growth and 5% same-store sales growth. 2 year same-store sales growth was 8% for the quarter. Taco Bell continues to focus on long-term growth opportunities by expanding into multiple category entry points, including the re-launch of breakfast in August and the fried chicken category with the Crispy Chicken Sandwich Taco during the quarter. Meanwhile, Taco Bell International remains focused on their visions to make tacos cool around the world, while also ensuring the brand is culturally relevant in each market. In the UK, we gave away three tacos to the country to celebrate England advancing to the finals in the European Championship. Players on the English team even tweeted on behalf of the brand, resulting in Taco Bell being 1 of the top trending brands on Twitter during the final. And finally at the Habit Burger Grill, we saw our system sales grow 19% during the quarter, driven by 11% same-store sales growth and 7% unit growth. On a 2 year basis, same-store sales grew 7%, which included the impact of about 1% of stores being temporarily closed as of the end of June 3. We continued to see strong results through our digital channels, even as customers returned to our dining room. During the quarter, we launched the culinary forward balsamic grilled chicken and asparagus salad that highlighted our unmatched chargrilled chicken and seasonal ingredients. Now I'll discuss our unrivaled culture and talent growth drivers. The whole market beyond was our people first culture. We have tremendous leaders across our organization that have been developed internally to lead our brands. And because of our culture, we're able to attract world-class external talent. This quarter we had the opportunity to announce some exciting internal promotions with planned leadership transition. First, Tony Lowings, CEO of KFC, will be retiring on March 1st, 2022. I want to thank Tony for his more than 25 years working at Yum!. He has embodied what it means to be a people first leader throughout his career, and will no doubt leave a lasting legacy on the KFC brand. Tony's (ph) successor will be Sabir Sami KFC's Global Chief Operations Officer, who is an incredibly well-respected, and experienced leader who has played a pivotal role in the KFC Global Business. Sabir's promotion to CEO of KFC provided an opportunity to elevate another internal talent with Dyke Shipp stepping in as President of KFC, after serving as KFC's Global Chief People and Development Officer. With their combined experience of over 40 years with Yum!, both Sabir and Dyke will assume their new roles effective January first 2022. I couldn't be more confident in our ability to continue to unleash the power of this iconic brand with both Sabir and Dyke leading KFC. Next, we recently announced that David Gibbs, Pizza Hut, U.S. General Manager, will be promoted to President of Pizza US. effective January 1st, 2022. Alongside Kevin Hockman, David has helped architect the Pizza Hut, U.S. strategy and is the right person to lead the way forward for the brand by continuing to partner with our franchisee. With this promotion, Kevin Hockman, Interim President of Pizza U.S. and President of KFC U.S. will return full-time the KFC U.S. I would like to thank Kevin for his unwavering commitment and leadership over the past 2 years as he led the Pizza U.S. business and franchisees for a critical turnaround that has shown tremendous progress to date all while simultaneously taking KFC U.S. to new heights. These internal promotions demonstrate that our deep bench of experienced leaders is a real competitive advantage for us across the restaurant industry. Lastly, we recruited significant external talent with the appointment of Aaron Powell as Chief Executive Officer at Pizza Hut. Aaron joined us from Kimberly-Clark where he most recently led their Asia-Pacific business. We're thrilled to have Aaron join our leadership team with his season CPG executive experience and believe his leadership alongside [Indiscernible], David Graves, will help fuel the brand growth strategy. Equally as important as our recipe for growth is our recipe for good. I could not be prouder of the progress Yum! Brands have made this year in sharpening the focus and execution of our ESG agenda, particularly on climate action and sustainable packaging, alongside our global unlocking opportunity initiatives to tackle inequality. We are advancing our plans to reduce greenhouse gas emissions across our global system and supply chain by nearly half by 2030 while we work to implement, learn from and scale pilots for reusable, recyclable, and compostable packaging in the front of our restaurants to meet our 2025 public commitments. Across all programs, we're focused on building a resilient business for the future with purpose and sustainability as the core. Our iconic brands and unmatched scale put us in a class of our own. We're competitively advantaged given the size and capabilities of our franchise system. And I'm thrilled with our teams as we continue to be nimble and meet the consumer where they are. Overall, I'm proud of how our business is performing and I'm confident that we're positioned to win in a post-COVID world. With that, Chris, over to you.

Operator:

We will now begin the question and answer session. To ask a question [Operator Instructions] Again please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question comes from John Glass with Morgan Stanley. Please go ahead.

David Gibbs:

Yeah. On a -- In terms of staffing, obviously, we're pressured in our restaurants just as everybody else is. But I think we're doing an amazing job in the field of being focused on retention. We won't have a staffing problem if we don't have any open jobs if we retain the employees that we have. And given the culture that we have in our restaurants across all of our brands, and the kind of environment that our franchisees create for their employees with pay checks and pathways to advancement, I think we're getting through this better than most. We're really proud of the results we put up across all of the brands this quarter. You guys probably saw it's on a 2-year basis. We're positive on all 4 brands. On a 1-year basis, we're positive on all 4 brands. And then obviously, the big news is the 760 net new units that we open for the quarter, so very strong quarter. We've got pluses and minuses. John, if you're talking about in the U.S., KFC was up 13 on a 2-year basis, Pizza Hut, HMR, business -- Home Meal Replacement business was up 17, Taco Bell was a little bit softer. For them, late-night and breakfast become a little bit more of a challenge, and they skew a little bit more towards individual meals. And I think that's what you're seeing. Every brand has a different set of attributes as we go through this. Some will play better in this environment than other, but all of our brands are doing quite well, which is contributing to this great quarter.

David Palmer:

Thanks. Just a quick follow-up on John's, and then I have one on unit growth. The Taco Bell results, 8% two-year. That's below the industry's comp. Taco Bell has been a long term share gainer. If you have a big picture comment about maybe sources of weakness, whether supply chain, the Midwest, something like that, also just bigger picture. Why you think Taco Bell on a two-year basis might not be as doing as well as the industry average of drive-through chains out there? And then on unit growth do you -- the results are very strong and it's hard to see weakness or hold backs from a development standpoint from a macro sense. But we would expect there to be that, that there would be some friction out there given all the macro challenges around COVID. Do you believe that there is something hold you back even in the strong numbers? Thanks.

Operator:

The next question comes from David Tarantino of Baird. Please go ahead.

David Gibbs:

Yeah, thanks, David. As David mentioned, we are very excited about the momentum in development. And if you think about the drivers, the number one driver is unit economics. So that gets that both parts of your question. Around the globe -- in general, our franchisees are seeing strong EBITDA, and they are seeing that translate to improved returns whenever they build restaurants. Remember, these are our franchisees putting their capital to work, and that's where I think the strength of the brand and the larger average size of our franchisees

David Gibbs:

As far as the issue of pent-up demand, I'm sure there's some units that spilled over from 2020 into 2021, but we do believe that these trends in development will continue We think we've gotten to a new level on development that's why we raised our development guidance on the last earnings call. Look, we're talking about net new units. Let's talk about growth new units for the quarter. In the quarter, we opened over a thousand gross new units. That's a store every other hour, basically, all quarter long. Pretty amazing. And when you think about just the side effect of that, how we're modernizing the estate with that kind of development, it's really encouraging.

John Ivankoe:

Hi. Thank you very much. I think a lot of us on the call know what the U.S. issues are in terms of construction labor, and permitting, and even equipment. But I wanted you to give us a rest of the world view in terms of how supply chains are around equipment and your ability to, I guess again, keep us get current rate of development over the next couple of quarters. And of course, asset in the context of your supply chain seems to have gotten worse in the past 6 months, and perhaps some of the stores that opened in that third quarter benefited from what was ordered, 6 months ago or even longer. Do you expect this momentum to continue with their -- that pipeline, just in terms of overall supply chain constraints, however, you want to define it that you feel good on a market-by-market basis?

Operator:

The next question comes from Jon Tower with Wells Fargo. Please go ahead.

Jon Tower:

with obviously wage rate inflation as well as commodity cost inflation. How are you messaging to the franchisees? The best way to handle it to the extent obviously can have influence on it. In terms of new product news, are you constructing items, say at Taco Bell or KFC, for next year that will allow them to at least maintain some of the penny profits so they're not getting squeezed too much in this inflationary environment? Thank you.

Operator:

The next question comes from Brian Mullan with Deutsche Bank. Please go ahead.

David Gibbs:

We appreciate the question on Habit. We're really excited about Habit 's performance. If you think about it, they started pre -pandemic 60% dine-in sales. So they had the biggest hill to climb in this environment and just put up a plus 7 on a 2-year basis. So the way they've pivoted has been truly impressive. I think it hasn't gone unnoticed, we've had lots of demand from franchise -- from potential franchisees, both in the Yum! system and outside the Yum! system to enter. We've now started closing on a few deals. We closed on two already with Yum! franchisees entering the Habit system, and we have more in the hopper. So we're seeing strong demand and interest in becoming Habit franchisees because the unit economics are great to all the reasons why we bought them. As far as international goes, same-story there. As you know, they're already in a couple of countries. I just was on a call yesterday where we were evaluating a new potential partner to enter in another country. So we've built up a little bit of capability and the team internationally to focus on Habit International and see every indication that that can become a growth driver for Yum! down the road.

Operator:

Thank you. And that will come from Dennis Geiger with UBS. Please go ahead.

David Gibbs:

Yeah. Look, Pizza Hut U.S. is obviously a bright spot for us right now and will be for the long term as all the work that we've been doing over the last few years, investing in digital and capabilities and working with our franchise partners has really starting to pay off. This quarter Pizza U.S. sales were up 17% off-premise basis, which is the heart of the business and the future of the business. But it's not immune to the same staffing challenges that everybody's facing. So I'm sure those sales were held back to some degree by the challenges of getting drivers. We actually saw our carryout business is now starting to grow faster. When we don't have the ability to get drivers were still able to pivot to carry out. But so we know that there's a lot of demand for what we're offering at Pizza Hut and with a bright future in the U.S. The other thing I'll point out is our investment in digital at Pizza Hut has been really one of our leading investments in the world of digital. That's one of the advantages at Yum! has are knowledge of digital through the Pizza Hut business. You guys all picked up on the fact that we had over $5 billion of digital sales yet again, this quarter. But interesting context on that across Yum is our dine-in business started to climb this quarter. So from Q2 to Q3, we did see a return to dine-in, yet we saw digital sales go up and we saw digital mix go up, which is proving that not only is it sticky that it's still something that's going to continue to grow for us, which is a great sign for all of our brands as we move forward. With that, I want to thank everybody for the time on the call. We're obviously excited about what's going on with digital and what's going on with net new unit development, widespread same-store sales growth on a 1 and 2-year basis across all of our brands. A lot of momentum in the business right now, a lot of enthusiasm from our franchise partners with record profits at the unit level. And very excited about the path forward for Yum! and our four brands. Thank you.

Operator:

Good morning, and welcome to the Second Quarter 2021 Yum! Brands, Incorporated Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Jodi Dyer, Vice President of Investor Relations and CFO, Digital & Technology. Please go ahead.

David Gibbs:

Thank you, Jodi, and good morning, everyone. I'm excited to share our strong second quarter results as we delivered record second quarter unit development and 23% same-store sales growth. Importantly, each division reported positive same-store sales growth on a 2-year basis, a step-up from first quarter trends. This sustained momentum was underpinned by our investments in digital and off premise and the adaptability of our brands to meet the needs of consumers in an ever changing environment. Though COVID obviously creates a more challenged operating environment, our confidence is stronger than ever in our ability to navigate the resulting uncertainties and in the long-term growth potential of Yum!. As a result, we're reinstating our long-term growth algorithm with one important change, we are raising our previous guidance of 4% unit growth to between 4% and 5% unit growth. As a reminder, our long-term growth algorithm includes 2% to 3% same-store sales growth, and mid-to-high single-digit system sales growth, leading to high-single-digit core operating profit growth. The diversification of our global portfolio, the resilience of our business model, and the agility of our teams are allowing us to compete and win in a full range of market conditions, including both those markets with accelerated recovery and markets still heavily impacted by COVID. Looking forward, our iconic brands and unmatched scale, in combination with the world-class talent in our restaurant teams, franchisees, and above store leaders have uniquely positioned us for sustained growth. Now, we'll discuss our recipe for growth and our Q2 performance and the growth drivers that underpin it. To start, I'll cover two growth drivers, namely relevant, easy, and distinctive brands or RED for short; RED, for short; and Unrivaled Culture & Talent. Then Chris will share more details of our Q2 results, our Unmatched Operating Capability and Bold Restaurant Development growth drivers and our strong liquidity and balance sheet position. First, a few highlights from the quarter. In Q2, Yum! system sales grew 26%, driven by 23% same-store sales growth. Importantly, same-store sales grew 4% on a 2-year basis, which includes the impact of approximately 700 or about 1% of our stores being temporarily closed due to COVID as of the end of Q2 2021. This was driven by continued strong sales momentum in North America, the UK, and Australia with improved performance in Europe as it began to reopen and showed signs of recovery. As I mentioned earlier, each of our brands delivered positive 2-year same-store sales growth on a global basis, including the impact of temporary closures, and each brand also reported an improvement in the 2-year trend from Q1. This is a great indicator for the sustained strength and breadth of our recovery, even more exciting as the extremely strong net new unit growth of 603 units that we delivered during the quarter, which was both broad based and record setting. Looking across the more than 150 countries in which we operate, we've seen that while the overall global trend is positive, the recovery will neither be consistent from country to country nor linear within a country. This insight reinforces the competitive advantages of our diversified portfolio and our ability to serve customers through multiple armed and off premise channels. We've seen that increased customer mobility driven by reopening trends and vaccinations contributed to strong performance in many of our markets. A key growth driver for our business and priority for our teams is the continued acceleration of our digital and technology initiatives across the globe geared toward providing customers with new and seamless ways to access our brands. Even as economies continue to reopen, the importance of the off-premise occasion remains a top priority. We delivered a second quarter record with over 5 billion in digital sales, a 35% increase over the prior year. Even more exciting for the first time on a trailing 12-month basis, we delivered more than $20 billion in digital sales. We believe these sales are highly incremental and result from our investments in our digital and technology ecosystem, which enable our teams to deliver an even more RED customer experience. To bring the impact of our digital efforts to life, I want to share a few proof points. At Taco Bell U.S., the launch of our Taco Bell Rewards Program in 2020 has continued to grow digital sales for the brand with features such as loyalty member exclusives, and early access to crave worthy promotions. We're incredibly excited by the early results from the program and the future growth opportunity that remains. We're seeing significant uptick in frequency and higher spend per visits leading to an increase in overall spend of 35% for active customers in the Taco Bell Rewards Program compared to their pre-loyalty behavior. As another example, at KFC U.S., we launched our internally built KFC e-commerce website and app in early 2021 replacing our previous third-party solution. As a result, our 2021 digital sales are on pace to soon surpass last year's full-year digital sales amount. Now, let's talk about our RED brands. Starting with the KFC division, which accounts for approximately 51% of our divisional operating profit, Q2 system sales grew 35% driven by 30% same-store sales growth and 5% unit growth. For the Division, Q2 same-store sales grew 2% on a 2-year basis, which includes the impact of about 1% of our stores being temporarily closed as of the end of Q2 2021. At KFC International, same-store sales grew 36% during the quarter. Same-store sales declined 1% on a 2-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021. We had truly outstanding results in market leading to recovery with double-digit 2-year same-store sales growth in the UK, Australia, Canada, and the Middle East. Our strong off-premise capabilities, digital strength, and value offerings have continued to meet shifting consumer demand around the globe, and there is opportunity for continued recovery as reopening and mobility increases globally. Next, at KFC U.S., we continue to see strong momentum with 11% same-store sales growth in Q2. Importantly, same-store sales grew 19% on a 2-year basis, owing to the continued strength of our group occasion business, the digital capabilities mentioned earlier, and our new chicken sandwich. Our chicken sandwich performed exceptionally well and provides us with a solid platform to drive additional sales layers in the future. Moving on to Pizza Hut, which accounts for approximately 17% of our divisional operating profit, the division reported Q2 system sales growth of 10% driven by 10% same-store sales growth. While the division had a 3% unit decline versus last year, driven by the elevated COVID-related dislocations and closures of 2020 it has sustained its positive 2021 development momentum delivering 1% unit growth relative to Q1. Global Q2 same-store sales grew 1% on a 2-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021. Overall, Pizza Hut International same-store sales grew 16%. Same-store sales declined 6% on a 2-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021. Importantly, the off-premise channel achieved 21% same-store sales growth on a 2-year basis for the quarter and delivery continued to be the primary driver of growth as the shift towards an off-premise model continues in most of our Pizza Hut markets. The top line results from our Australia, Canada, Malaysia, and our U.K. delivery business are shining examples of what it means to nail the RED Brand strategy. These markets continue to unlock off-premise growth opportunities through a focus on value and innovation, a digital-first customer experience, and distinctive communications with the help of our magnetic ambassadors, spokespeople who bring our brand to life across the world. At Pizza Hut U.S., we continue to see positive same-store sales with 4% overall same-store sales growth. On a 2-year basis, the off-premise channel grew 18% and overall same-store sales grew 9%, which includes the impact of about 1% of our stores being temporarily closed as of the end of Q2 2021. Pizza Hut also delivered strong product news with the continued success of our iconic stuffed crust pizza and the successful return of a consumer favorite, the Edge Pizza during the quarter. As for Taco Bell, which accounts for approximately 31% of our divisional operating profit, Q2 system sales grew 24%, driven by a 21% same-store sales growth and 2% unit growth. For the division, Q2 same-store sales grew 12% on a two-year basis. The quarter kicked off with the return of the Quesalupa as part of the fan-favorite $5 Chalupa Cravings Box, followed by the re-launch of the iconic Naked Chicken Chalupa. In May, we launched our first-ever global brand campaign, #ISeeATaco, in which fans could score a free taco when the moon looked like a taco. We generated over 2 billion impressions and step-change brand awareness, especially in our international markets where we have a tremendous run rate for growth. And finally, the Habit Burger Grill delivered 31% same-store sales growth and 6% unit growth. Q2 same-store sales grew 7% on a 2-year basis. Importantly, digital sales continued to mix over 35%, only a modest pullback from Q1, even as dining rooms continued re-opening and dine-in sales saw a steady improvement throughout the quarter. On the innovation front, we introduced the Brunch Charburger during the quarter, a unique all-day breakfast offering that included crisp golden tots, house-made secret sauce and a freshly cracked egg. In addition to providing customers with a seamless experience to access our brands, we continue to invest in restaurant technology initiatives that make it easier for our team members to operate and run a restaurant. As previously announced in the quarter, we’ve agreed to acquire Dragontail Technologies, a cutting-edge restaurant technology company, whose platform is focused on optimizing and managing the entire food preparation process from order through delivery, including automating the kitchen flow, driver dispatch, and customer order tracking. The acquisition is subject to various approvals and we expect to close by the end of the third quarter. We will not be able to comment further on Dragontail today, but you can find additional information in the May 26 press release. An important factor of RED Brands is having a positive impact and the desire to make good easy for customers. Our Recipe for Good framework focuses on our commitment to investing in the right recipe today. We were proud to publish our 2020 Recipe for Good report this week, which highlights our strategic investments in socially responsible growth and sustainable stewardship of our people, food, and impact on the planet. The report includes updates on our key commitments on critical issues like climate change and equity and inclusion. I’m confident that our plans in these areas have the right ingredients for us to succeed and make a positive impact for our people, franchisees, customers, and communities. Now, to unrivaled culture and talent. Two of our key assets are our iconic brands and the people that bring our brands to life around the world every day. As I’ve mentioned in previous quarters, COVID has further strengthened the collaboration partnership across our entire system. A great example of this is our relationship with our independent supply chain purchasing co-op in the U.S., RSCS. Many of you probably saw the recent announcement that the CEO of RSCS, Steve McCormick has made the decision to retire in early 2022 and that RSCS Chief Operating Officer, Todd Imhoff, was unanimously selected to succeed Steve in the role of CEO. Steve has had a tremendous and positive impact on our business for nearly a decade and our entire system is grateful for his leadership. At the same time, Todd is the right leader to step into this role and lead the RSCS moving forward as it continues to provide a true competitive advantage for our entire U.S. business. Our unrivaled culture and talent has always been a towering strength of Yum! and I’m incredibly proud of our ability to bring our brands and people together in ways we haven’t in the past. During the quarter, we hosted several virtual meetings where we fostered collaborations on a global scale for our franchisees and teams, including marketing, planning meetings, ops, development programs, a global finance summit, leaning with leaders sessions, and company-wide chats just to name a few. It’s during these meetings that we realize we are all more alike than we are different and the power that our brands and our culture have to bring people together. To wrap up, I’m pleased with the sustained momentum in our business and the agility we’ve shown in the last year and I’m optimistic that we are set up to win. Our results demonstrate the resilience of our diversified global business and confidence in our strategies, which are fueled by the underlying health of our franchise system. We are poised to accelerate growth and maximize value creation for all our stakeholders for years to come. With that, Chris, over to you.

Operator:

Thank you. [Operator Instructions] Our first question comes from John Glass from Morgan Stanley. Please go ahead.

David Gibbs:

Thanks, John. Yes, obviously, we’re excited about net new development. And as you know, we do have a lot of visibility into the pipeline of our development because it takes about 12 months to plant the seed of development before you get the opening. So, we’re working with our franchise partners around the world to get that visibility, understand what’s coming down the pike, and that’s what gives us the increasing confidence, but really that all starts with the unit economics. When our unit economics are good, it’s an attractive proposition for our franchisees to build. You saw Yum! China last night talk about that. We’re seeing that in the vast majority of the world right now, which is what gives us the confidence to make that commitment to 4% to 5% net new unit growth. And just to clarify, that would apply to 2021, as well as 2022 and beyond. As far as domestically, we do think we’ve talked about this past on calls. We do think that there’s upside for KFC and Pizza Hut, particularly in the U.S. Taco Bell is starting to accelerate the development. So that went all – that trend is moving, but KFC and Pizza Hut haven’t historically been growing in the U.S., and we think there’s every reason in the world they should be net growers and they’re shifting into that in 2021 and we think that will continue.

Dennis Geiger:

Great. Thanks for the question. Maybe just a follow-up on that impressive unit growth target acceleration, David and Chris. As it relates to kind of where that might be coming from, as you contemplated that acceleration, Chris, I think you spoke to all brands would be seeing the increase. Is it any in particular over the next few years or longer-term where you feel like you’re really seeing something interesting where one brand more so than others might be driving that acceleration, and how to think about the timing of that over the next few years perhaps, just curious if any additional insights to share there? Thank you.

Operator:

Our next question comes from John Ivankoe from JPMorgan. Please go ahead.

David Gibbs:

Thanks, John. And just to clarify, obviously when we report quarterly results that has the trailing 12 months in it, which we had some closures last year. So, when we’re talking about our 4% to 5% net new unit growth algorithm now, we’re talking on an annual basis starting in 2021. So that’s what we’re expecting for 2021, 2022, and beyond. As far as the second question on catch-up units, certainly, there were some units that were put on hold in 2020 that have opened in 2021, no doubt. And that’s helping us get to the number for 2021, because we had to restart the development engine. But by issuing the guidance on – as part of our long-term algorithm, we’re obviously clearly trying to signal that we think that will continue into 2022 with organic growth, again, based on the factors I mentioned earlier

Brian Bittner:

Thanks. Good morning. I’m going to ask my question on the KFC International business. When you adjust for the store closures, the two-year same-store sales for KFC International were positive. They turned positive in the quarter. This was despite what we heard from China last night, your largest international market, where sales do still remain below pre-COVID levels. So, can you again highlight where you are seeing this offsetting strength KFC International? And maybe, if possible, could you give us a glimpse of how those better markets are performing on a 2-year basis relative to the whole international business?

Operator:

The next question comes from David Palmer from Evercore ISI. Please go ahead.

David Gibbs:

Yes. Thanks, David. I’m glad you asked about digital. Obviously, it’s something we’re really excited about as we are now on track for trailing 12-month $20 billion of digital sales. We’ve been making investments and developed a long-term strategy for how to win in digital for many years now. So this is starting to pay off, not something that happened overnight. You’ve seen us make investments in things like Quick Order, Quantum, Tictuk, Dragontrail now more recently, and then investments in people. So, this is something where we’ve been building up the capability in all aspects. We developed a road map to win in digital and now we’re implementing that, and it’s actually been accelerated by COVID. But it’s all the things that we were expecting to happen to the business are happening. It’s really hard to single out which part of the business is going to benefit most from digital, because all of our brands are very rapidly becoming digital brands. You’re seeing that in the numbers. Obviously, the brands like Pizza Hut that tend to – that started with a bigger digital base of customers, launched loyalty first. They’re getting a benefit because it’s central to what they do. But really on a growth basis, it’s the brands like our other brands that started up from a smaller base that are really getting a big benefit, and it is both the U.S. and an international play. It’s widespread and we do think it can fuel the business for a long time to come, part of the reason why we confidently reinstated our long-term growth algorithm.

Jeffrey Bernstein:

Great. Thank you very much. Just a question on the broader inflationary topic, which you mentioned in your prepared remarks. Clearly, the franchise model insulates corporate, which is a good thing. But I am just wondering how you think about the outlook maybe for the system in terms of both commodities and labor over the next 12 months or so? I’m assuming the pressure is outside and I was wondering how you respond in conversations with franchisees. I guess, qualitatively, whether you prefer to take the hit to margin or suggest they would take a hit to margin or are there maybe incremental cost savings or incremental menu pricing, maybe you can share the current pricing by brand to help us understand how the franchisees are managing? Thank you.

Operator:

The next question comes from Jon Tower from Wells Fargo. Please go ahead.

David Gibbs:

Yes. Look, digital is one of those things that had no downside. Obviously, the customers are – you have a better experience when it’s a digital experience. The average check is higher. There’s labor savings from processing orders on digital. So, the link to development is probably pretty – is pretty clear, right? It’s going to give you better unit economics when you have higher check and less labor associated with the check and stickier customers by the way. So, we do think digital as part of our upside for development as we go forward and you’re also seeing our brands develop new assets that take advantage of that, Taco Bell is best example of that, is the Taco Bell Go Mobile asset, which is, as you mentioned a smaller footprint, more on digital and should give our franchisees better unit economics. Obviously, this all starts and ends with franchisee unit economics, and to the extent that digital improves that, it’s going to drive development.

Operator:

Okay. Our next question is from David Tarantino from Baird. Please go ahead.

David Gibbs:

Yes. Thanks, David. The Pizza Hut strategy, as we’ve talked about over the last few years, has been to revitalize the brand and driving asset transformation. But it’s focused on a modern off-premise business. And through COVID, both Pizza Hut U.S. and Pizza Hut International has continued to drive progress on that front. If we take Pizza Hut U.S. specifically, if you saw last year that we drove a number of closures in the system that did move our mix of [Delco assets] by a few percentage points. So, we’re continuing to make progress on that transformation. There is still further to go. So, we’re going to continue to drive that. But in terms of net unit count, you’ve seen a change in that trajectory. We were actually slightly positive this quarter in Pizza Hut U.S., which we think reflects the improved unit economics in the U.S. that stem from the strength of the brand. And then across both Pizza Hut U.S. and across Pizza Hut International, you’re continuing to see strong growth in off-premise, roughly 20% [indiscernible] I think we were 18% in Pizza Hut U.S. on a 2-year basis and 21% in Pizza Hut International. So, we think the strategy is working. We think the brand is strengthening. Still more work to go on continuing to transition the asset base, but we’ve seen a change in trajectory on unit counts. I think with that, we’ll wrap up. I just want to thank everybody for the time on the call. And obviously, you sense that results are strong. But underlying those results, what’s really encouraging for us is that all four brands are performing well. You saw that on a global 2-year basis they were all positive. They were all positive on a global basis in the U.S. Those all four brands had improved trends from Q1, which really bodes well for the future. And a lot of it is being fueled by digital obviously with $5 billion of digital sales in the quarter and on-track for over $20 billion on an annual basis. But it’s not just the top line story, it’s also on the net new units side with 603 net units in the quarter, a record no matter how you slice it. And all of that obviously adds up to great confidence in the business and the way forward and which is why we reinstated our guidance and raised our net new unit target. We know we have a lot of work and a lot of exciting work ahead of us to continue to grow and accelerate the brands. The team is fired up for it and it’s a great quarter, but there’s a lot more to come. Thanks for your time, everybody.

Operator:

Good morning, and welcome to the First Quarter 2021 Yum! Brands, Incorporated Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Gavin Felder, Chief Strategy Officer and Interim Head of Investor Relations. Please go ahead.

David Gibbs:

Thank you, Gavin, and good morning, everyone. We've had a strong start to 2021 with solid same-store sales results on a 2-year basis and a meaningful uplift in unit development. This performance is a testament to the incredible focus and dedication of our restaurant teams, franchisees and above-store leaders around the world who are rising above the challenges presented by the pandemic to unlock new areas of growth such as digital and off-premise, while putting the needs of our customers and local communities first. I've always believed that our success will come from leaning into our core strengths and building new capabilities that enhance our ability to grow. And the way our business has navigated through COVID-19 has only reinforced this belief. This mindset is reflected in our Recipe for Growth and Good framework, which has successfully guided our strategy and will continue to serve as our north star. Our recipe highlights our unique strength as a company, notably, our iconic brands, our unmatched global scale, our diversified network of highly capable and well-capitalized franchisees and our unparalleled culture and talent. Today, we'll discuss our Q1 performance through the lens of this framework and the growth drivers that underpin it, and we'll highlight the specific areas where we've introduced new capabilities as we look toward the future. I'll cover two growth drivers, namely, relevant, easy and distinctive brands, or RED, for short; and Unrivaled Culture & Talent. Then Chris will share more details of our Q1 results, our Unmatched Operating Capability and Bold Restaurant Development growth drivers and our strong liquidity and balance sheet position. I'll start with a few first quarter highlights. In Q1, Yum! system sales grew 11%, driven by 9% same-store sales growth and the addition of 435 net new units during the quarter. Importantly, same-store sales grew 2% on a 2-year basis, which includes the impact of nearly 900 or about 2% of our stores being temporarily closed due to COVID as of the end of Q1 2021. This was driven by strong sales performance in North America, the UK, Australia and Japan, with some offset from COVID-related trading restrictions in parts of Asia and Europe. Notably, all four of our brands had a weekly per restaurant sales record in the U.S. at least once during the quarter. And I'm very encouraged that on a 2-year basis our overall same-store sales in the U.S. increased 10%. Importantly, each of our brands experienced positive 2-year same-store sales growth on a global basis in open and operating stores during Q1. This is a great indicator for the strength and breadth of our recovery. The key focus point for our teams was the continued acceleration of our digital and technology initiatives across the globe, all geared towards providing customers with new and seamless ways to access our brands. Delivery has been a significant part of this strategy, and we now have over 39,000 restaurants offering delivery, representing a 16% increase year-over-year, driven by expanded aggregator partnerships and continued investment in our own branded channels. We had another record digital system sales quarter with over $5 billion, about a 45% increase over the prior year. Now let's talk about our four brands, starting with the KFC Division, which accounts for approximately 48% of our divisional operating profit. Q1 system sales grew 11%, driven by 8% same-store sales growth and 4% unit growth. For the division, Q1 same-store sales were flat on a 2-year basis, which includes the impact of about 1% of our stores being temporarily closed as of the end of Q1 2021. Globally, KFC's digital sales mix reached a record of 43% during the quarter, driven by the rapid expansion of delivery, click and collect and the introduction of new channel ordering options. At KFC International, same-store sales grew 7% during the quarter. Same-store sales declined 2% on a 2-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q1 '21. We continue to see strength in the UK, Australia, Canada and Japan during the quarter and saw encouraging results in the Middle East, Mexico and Africa. Each of these markets performed well above their 2019 sales levels, owing to their off-premise capabilities, digital strength and impressive product launches like the Share Box in Japan and the Chicken Nights promotion in Mexico. Next, at KFC U.S., we continue to see positive same-store sales, with 14% growth in Q1. Importantly, same-store sales grew 11% on a 2-year basis, thanks to all the team's hard work in building additional sales channels and growing the core business while adding hyper-relevant product innovation such as the new Chicken Sandwich. Our sandwich is performing at more than twice the volumes of our prior U.S. sandwich launches. And all initial indications are that it's highly incremental. Customers are loving the product and coming back more frequently for it. In fact, as we've entered Q2, demand for the new sandwich has been so strong that, coupled with general tightening in domestic chicken supply, our main challenge has been keeping up with that demand. Moving on to Pizza Hut, which accounts for approximately 17% of our divisional operating profit. The division reported Q1 system sales growth of 7%, driven by 12% same-store sales growth and a 4% unit decline. Global Q1 same-store sales declined 1% on a 2-year basis, which includes the impact of about 3% of our stores being temporarily closed as of the end of Q1 2021. Overall, Pizza Hut International same-store sales grew 8%. Same-store sales declined 7% on a 2-year basis, which includes the impact of 3% of our stores being temporarily closed as of the end of Q1 2021. Importantly, the off-premise channel achieved 10% same-store sales growth for the quarter. Similar to KFC, our developed markets with high off-premise capabilities, digital strength and newsworthy products continue to perform well. Pizza Hut U.S. had another stellar quarter, delivering 23% same-store sales growth in the off-premise channel, with 16% overall same-store sales growth. Overall same-store sales grew 8% on a 2-year basis, which includes the impact of 3% of our stores being temporarily closed as of the end of Q1 2021 and was driven by a combination of compelling value with the $10 Tastemaker offer and category-leading innovation with the launch of the unique Detroit Style Pizza and the reboot of our iconic Stuffed Crust Pizza. As for Taco Bell, which accounts for approximately 36% of our divisional operating profit, Q1 system sales grew 11%, driven by a 9% same-store sales growth and 1% unit growth. For the division, Q1 same-store sales grew 10% on a 2-year basis. The quarter kicked off with the return of Nacho Fries, this time offered in the $5 Nacho Fries Box. We also introduced our first digital-led product launch with the $5 Build Your Own Cravings Box available exclusively on the Taco Bell app or web, which drove a meaningful increase in loyalty memberships during the quarter. And finally, our newest brand, The Habit Burger Grill, delivered 13% same-store sales growth and 6% unit growth during the quarter. Q1 same-store sales grew 3% on a 2-year basis, which includes the impact of about 2% of our stores that were temporarily closed as of the end of Q1 2021. We introduced our new Patty Melt, and our sales growth was aided by reduced government restrictions and government stimulus. Encouragingly, digital sales continued to mix above 40%, even as dining rooms reopened, and we saw a steady improvement in the dine-in channel throughout the quarter. On to the Recipe for Growth, starting with RED brands. Having four brands across more than 50,000 restaurants provides us with an enviable platform to understand how consumers are behaving in every corner of the world and to use that understanding to capture future growth in our sales overnight and our brands over time. In some cases, this means strengthening our ability to grow sales at a faster pace and bringing in strong diverse tech talent. It's with this in mind that we were excited to close on two strategic acquisitions during the quarter, being Kvantum, Inc. and Tictuk Technologies. Kvantum is a true innovator in marketing optimization with a proven track record of adding significant value with enabling data-driven decisions to drive return on advertising dollars and sales increases. We have seen material improvements in both marketing spend efficiencies and same-store sales growth in our Pizza UK off-premise and Pizza Hut Taiwan businesses as a result of leveraging their toolkit. And at the end of last year, both Taco Bell U.S. and KFC U.S. engaged Kvantum services on marketing calendar and mix optimization. Tictuk presents an exciting opportunity to expand access by providing frictionless ordering through text, social media and other conversational channels in literally just a few clicks. We've deployed their platform in approximately 900 KFC, Pizza Hut and Taco Bell restaurants across 35 countries outside of the U.S. and have been thrilled with the agility and customer obsession of the Tictuk team. In fact, we have several examples of customers completing orders on the Tictuk platform in under 10 seconds, a truly seamless experience. Beyond their proven capabilities, what excites me most about these acquisitions is the high-quality, culturally aligned teams we've brought into our global organization. This is a perfect segue to our Unrivaled Culture & Talent growth driver. Given the environment we have been operating in, we have to find new ways to connect with the people across our vast global business. One way we've done this is through virtual market visits where we virtually walk through a restaurant and connect with team members. The leadership team and I attended four virtual market visits during the quarter in Pizza Hut Japan, KFC Asia, Taco Bell U.S. in Times Square and KFC Africa. We each left those meetings energized and proud of how our brands are represented around the world and the incredible people that make it all happen. Here, I also want to highlight two key actions we are taking to bring our Recipe for Growth and Good to life. On the equity and inclusion front in the U.S., we are taking tangible actions to represent the diverse communities where we operate by increasing Black and Latin employees and leaders in our corporate and restaurant management roles. As part of this effort, we're proud to partner with OneTen, a coalition of leading companies coming together to upskill, hire and advance 1 million Black individuals in America over the next 10 years. These actions advance our global Unlocking Opportunity Initiative in the U.S., and we are looking forward to working alongside the community of companies in OneTen as well as our franchisees to advance equity and opportunity. Finally, as part of our broader strategy to address climate change, earlier this week, we announced our pledge to achieve net zero greenhouse gas emissions by 2050 with a science-based target to reduce emissions by nearly 50% across our supply chain and restaurants by 2030, in partnership with our franchisees, suppliers and producers. This is an incredibly important issue to us, our customers and other stakeholders. And I'm proud of our continued progress in this space. To wrap up, I'm encouraged by the momentum in our business as we execute our Recipe for Growth and Good to set ourselves up for the next chapter of growth. Although COVID continues to impact many geographies and make our overall path to recovery uneven, I believe that, with our iconic brands, world-class talent, inclusive culture and healthy franchise system, we are poised to enter a post-COVID world even stronger. With that, Chris, over to you.

Operator:

[Operator Instructions] Our first question comes from David Palmer from Evercore ISI. Please go ahead.

David Gibbs:

Yes. Thanks Dave. I think you are right. KFC and Pizza Hut have done a tremendous job navigating this tricky environment over the last year. But very importantly, they have done a great job setting themselves up for future success. A lot of that, as you mentioned, good marketing, the rollout of the KFC sandwich, I mentioned it in my prepared remarks, but it bears repeating. That has been a very successful launch with a great product. It really is a winning product in the category, and we are excited about the impact that will have, along with Secret Recipe Fries that rolled out in the quarter. But on Pizza Hut specifically, the comment about health is also well put. The Pizza Hut franchisees over the last year, given the success they have had, the ability to close some of the underperforming dine-in stores that we have been trying to get out of, those – all of those moves together have strengthened their financial condition in a very big way and that sets them up for a much growth going forward. A big part of that is just the ownership of NPC, which we also mentioned, Greg Flynn and his organization taking over a good chunk of the Pizza Hut U.S. stores is a huge positive for the brand. They are great restaurant operators, great businessmen that has a great team underneath him, knows how to run restaurants as well as anybody in this country. And very excited about the impact he will have taking over those stores and improving their operations, fixing up the assets and growing the business.

John Glass:

Thanks and good morning. It was good to hear that unit growth is now sort of within the historical range, 3% this year, perhaps on the path back to 4%. Can you just drill down a little bit? One, just by brand, how you think that plays out? Obviously, you have led with KFC, but maybe there are some other opportunities within the other 2 brands this year. And also just thinking out over the next 2 years to 3 years, historically, you have led with KFC, but is there – has COVID changed the way you think – thought about the growth opportunity for the other 2 brands and maybe the balance of growth is going to be different going forward than it has been historically?

Operator:

The next question comes from Dennis Geiger from UBS. Please go ahead.

David Gibbs:

Yes. And for Taco Bell, I think there is excitement across the board for everything they have done over the last year under Mark King’s leadership and the great talent that we have at the brand and with our franchise partners, one of the strongest franchise systems you will ever find. The international development story is one that bears mentioning in terms of the opportunities we have there. We are starting to see ourselves get to scale in some markets. We always know that when we get to about 100 units in a market that’s when you really can start to unlock development, leverage marketing dollars to really create a virtuous cycle and a better unit economic play. We are starting to see that happen in a few markets around the world, and I think we are excited about the upside there. But even in the U.S., we also are leaning more into development as the unit economics look great right now. The opportunities in the U.S. real estate landscape are there. And our franchise partners are financially healthy and eager to go after them in concert with our team and picking the right opportunities that make money for them. The progress that we have made over the last year on digital is also an important part of the Taco Bell story. We are coming out of 2020 with a great loyalty program and a lot of loyalty members. That progress was made last year as we increased our digital sales. That lays the foundation for more success going forward. We did this – the first digital-only promotion of the $5 Create Your Own Box. It’s a great example of how having that digital business increasing gives us new tools to grow sales. So, I think the brand is really hitting on all cylinders. The product innovation is there. Once again, they have got something out of fries for the quarter, and they have got a great pipeline of stuff coming down the road. And the future for Taco Bell is incredibly bright with accelerating development growth, a strengthening brand, a great leadership team, great franchise partners.

David Tarantino:

Hi, good morning. I wanted to come back to your outlook for unit growth. And I guess, if I look at the first quarter, I think 435 net openings is the highest you have achieved in perhaps at least 10 years, according to my model. But I am wondering if there was anything unique to the quarter that would have driven that strength. And if you can comment on how that strong start to the quarter kind of translates to your guidance of at least 3%, but not perhaps getting to that 4% run rate, that would be helpful? Thanks.

Operator:

The next question comes from John Ivankoe from JPMorgan. Please go ahead.

Chris Turner:

Yes. Good question, John. And obviously with 290 brand country combinations it varies, a lot of this varies by each one of those. But in general, we are seeing as markets reopen, ticket come down a little bit. But the thing that determined a lot of our success going into this was our ability to serve family meals and serve larger tickets. So, the brands that had those options, like KFC buckets, and Pizza Hut meals for sharing, tended to do better. And we are not seeing that all go away. I think, as you think about the things that happened during COVID, accelerating trends, which ones of those are going to be sticky. I think we expect that ticket will come down from where it’s at, but I don’t know that it’s going return to its old levels. And we think that’s good. The same thing could be said for some of the digital business, the increases that we have had in digital, that’s going to be stickier and stay in our business. So even in the U.S., as we see dining rooms reopen, we are not seeing, for example, a decline in Taco Bell’s digital business. And so we are holding on to those gains. So yes, it’s probably fair to expect ticket to start to moderate. But not – I don’t know that it’s going to return to pre-COVID levels.

Jon Tower:

Awesome. Thank you. I appreciate it. I was just hoping you guys can tell us a little bit on the recent tech investments. I know David, you had mentioned that Kvantum has been in a couple markets so far. And Tictuk, if I am saying the name correctly, has been in about 900 stores outside of the U.S. So, I am curious to hear what you expect these platforms to deliver, and how you expect them to spread across the globe. What sort of unlock you are expecting for sales, and maybe perhaps dig into what you are seeing in those stores where the technologies been deployed versus stores where that hasn’t been the case? And if there is any incremental investment, perhaps on headcount, in order to see this opportunity scale-up across the globe?

Chris Turner:

Yes. And just one thing to expand on the return piece, we are buying these companies in order to improve our capability and provide services to our franchisees at the lowest possible cost that are really unique proprietary capabilities that we would have. They are not designed to drive a profit for Yum! We want to provide them at the lowest cost to our franchisees. The return for Yum! comes through top line growth in our franchise units, which leads to more royalty income. We think we have really got a great model here where we do these smaller acquisitions, but we can scale them across the world. They have almost no impact on our P&L initially, and then the return comes from growing sales and units improving franchise economics, which we all know is a virtuous cycle, which leads to more development and healthier franchisees is really our number one goal.

Brian Bittner:

Thank you. Good morning. As you analyze your different regions in country combinations for specifically for the KFC portfolio outside of the U.S., where are you in faxing store level volumes, having the biggest outperformance versus ‘19 levels? And on the flip side, where are you seeing the biggest underperformance versus 2019, just so we can maybe better understand what market recoveries are needed to drive a further acceleration in this positive to your trend that you are starting to see?

Operator:

Our last question comes from Sara Senatore from Bernstein. Please go ahead.

Dave Russell:

Thanks, Sara. I will take the first part of your question on technology. If you think about it, we do ask ourselves the question of should we build the capability in-house, should we acquire it and bring it in-house or should we contract with an external provider. And we run that test, and we think about, gosh, we should have it in-house, if it is a strategic competitive advantage, with high switching costs, and we need to have that in-house. We then assess our ability to develop it versus, the speed of integrating and the opportunity to attract or find a great candidate to acquire. Obviously, our ability to develop in-house is terrific right now with Clay Johnson coming onboard over a year ago, plus the strong technology teams that we have at each brands. And that’s where you saw the success with the launch of our KFC U.S. e-commerce platform which will continue to expand to other parts of the business. The Tictuk and Kvantum acquisitions for the reasons we talked about earlier, we think it was the right thing given that we had already seen the success and the impact they have had on our system to bring those in-house. And we have got plenty of examples where we contract with service providers where it’s either a less strategic capability or the switching costs are low. So that’s how we think about that. And again, as David said, we drive return from these primarily by driving system sales growth and creating better unit economics for our franchisees, which furthers development in the long run.

David Gibbs:

I guess, as the last question, I will just wrap up by saying we are all quite excited about Q1. But we know there is a lot more work to do. I think what you saw in Q1 just demonstrates the resilience of the business, how we are coming out of the pandemic in a lot of markets that are now getting to the other side of this stronger with a better foundation to grow. Evidenced by the development progress we are made in the quarter. But we all know this is a journey. We haven’t reached the finish line. We are not doing a victory dance. But we are very excited about the future. Appreciate everybody’s time today and look forward to talking to you on the next call.

Operator:

Good day, and welcome to the Fourth Quarter 2020 Yum! Brands, Incorporated Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Keith Siegner. Please go ahead, sir.

David Gibbs:

Thank you, Keith, and good morning, everyone. We entered 2021 a stronger company; primed to grow, made better and more resilient by the challenges of 2020. I'm incredibly proud of our people and the way our global system came together to navigate these challenges and offer new ways to safely and affordably serve customers. We galvanized our global systems commitment to our Growth and Good strategy, underpinned by a culture of collaboration across our brands, people and franchisees that we believe is unmatched and has put us on solid footing to move forward. In fact, to ensure this momentum on collaboration and execution continues, we recently elevated our Chief Transformation and People Officer, Tracy Skeans to Yum! Chief Operating Officer. This promotion formalizes the role she has already been playing to drive cross-brand collaboration on people capability and customer experience imperatives that fuel same-store sales and net new unit growth. This underlying alignment of vision and action is an often under appreciated competitive advantage for us and it's fundamentally central to our current and future growth. Across Yum!, we intensified our focus on leveraging our scale. As you're well aware, having more restaurants than any other company enhances our opportunity to create sustainable competitive advantages to fuel growth for our franchisees. This includes accelerating our deployment of digital and technology initiatives to enhance the customer experience, off-premise capabilities and unit economics across the globe. We now have over 35,000 restaurants offering delivery, representing a 16% increase year-over-year, in part driven by expanded aggregator partnerships. We ended 2020 on a digital sales high note, hitting a record of $17 billion, about a 45% increase over the prior year. As I enter my second year leading Yum!, I'm more confident than ever that our customer-focused digitally enabled brands will grow same-store sales, unit economics will support profitable development and Yum! is well positioned to maximize value creation for years to come. Our Recipe for Growth, using our four key growth drivers, continues to guide our long-term strategy. So I'll start with an overall review of 2020 results and use a few examples to demonstrate our Relevant, Easy and Distinctive brands or RED for short, unmatched operating capability and unrivaled culture and talent growth drivers. Then Chris will share more details of our Q4 results, our Bold Restaurant Development growth driver and our strong liquidity and balance sheet position. First, 2020 results. Overall, Yum! system sales declined 4%, including a 1% headwind of the lap of the 53rd week in 2019 with slightly positive net units year-over-year and a 6% same-store sales decline. COVID continued to impact the business through the end of the year, both in terms of temporary closures of restaurants and limitations on the use of dining rooms, upon which some of our markets heavily rely. This adversely impacted our core operating profit, which declined 8%, including a 1% headwind from the lap of the 53rd week in 2019. Now I'd like to provide some details regarding COVID-related temporary closures and the progress that we've seen. As of the end of the third quarter, we had about 1,100 temporarily closed units. This improved to about 1,000 as of the third quarter earnings conference call we hosted on October 29. We continued to see re-openings through the balance of the fourth quarter, but due to second wave COVID impacts, including increased government restrictions, temporary closures climbed back to about 1,000 in January, which is where we remain today. This means roughly 98% of our system is currently open in a full or limited capacity. Not surprisingly, the geographies experiencing temporary closures have evolved and we are now seeing more closures in Europe, Canada and the Middle East, offset by some re-openings in Latin America and India. By asset format, restaurants located in malls, transportation centers, airports and the like continue to be pressured, making up many of the temporary closures. All-in, the situation remains dynamic and largely dependent on local government responses to COVID. We've also continued to have a significant number of our open restaurants subject to dining room closures or other limitations on access. Pre-COVID-19, about one-third of our system sales came from the dining room. Despite the drag from these limitations, our off-premise channels, aided by digital, offset most of those lost sales and enabled our open store base to deliver same-store sales that were about flat for the fourth quarter in aggregate. Now let's talk about our four RED brands. Starting with the KFC Division, which now accounts for approximately 48% of our divisional operating profit, Q4 system sales declined 1% driven by a two percentage point negative impact from the lap of the 53rd week in 2019 and the 2% same-store sales decline, partially offset by 4% net new unit growth. KFC continues to reopen temporarily closed stores, though different geographies suffered from the second wave impacts of COVID and ended Q4 with about 98% open in a full or limited capacity. At KFC International, same-store sales declined 4% during the quarter, an improvement from Q3. The UK, SOPAC and Canada continued to show strong customer residents and operational execution, leveraging drive-thru and other off-premise channels to grow sales. Importantly, the most impacted geographies from Q3, such as India, Latin America and the Caribbean and the Middle East, started to show recovery. Across the globe, KFC continues to invest in innovation by filling gaps on their core menus or through rebundling, repackaging and reconceptualizing the core menu items. KFC U.S. continued to see positive same-store sales growth, delivering 8% growth in Q4, owing to continued strength in group occasions and digital. To kick-off our launch with DoorDash, we had a free tenders promotion, which performed particularly well and helped digital grow to a high-single-digit sales mix for the quarter. Moving on to Pizza Hut, which now accounts for approximately 17% of our divisional operating profit, the division reported a Q4 system sales decline of 6%, driven by a three percentage point negative impact from the lap of the 53rd week in 2019 and 6% net new unit decline and a 1% same-store sales decline. During the quarter, Pizza Hut continued to reopen temporarily closed stores and ended Q4 with about 98%, at least partially open in a full or limited capacity. Express units continue to be pressured, making up many of the remaining closures. Pizza Hut International same-store sales declined 7%. Our off-premise focused markets continue to excel, while our dine-in footprint continue to be a headwind. Our off-premise channel generated a positive 9% same-store sales growth. And we are continuing to emphasize and support the shift to off-premise, both through our operations and brand strategies. Further, markets that offered abundant value to customers helped drive strong performance in markets such as Canada and Asia. Pizza Hut U.S. had another stellar quarter, delivering 18% same-store sales growth in the off-premise channel with 8% overall same-store sales growth. Our $10 Tastemaker value offer continued to perform well, mixing over 20%. Just in time for the holidays, we introduced our Triple Treat Box, a premium product with abundant value. We also partnered with Beyond to be the first major pizza chain to successfully introduce a plant-based alternative product to the market. A few weeks ago, Flynn Restaurant Group announced its intention to acquire NPC's approximately 950 Pizza Hut U.S. restaurants. Flynn is an existing Yum! Brands franchisee for Taco Bell that is well capitalized and brings a strong track record of operational excellence. We expect Flynn's ownership of these restaurants will make the entire Pizza Hut U.S. system stronger, and welcome Greg Flynn and his team to the Pizza Hut family. The near-term plans include modernization of a significant portion of the restaurants acquired, while improving operations. As for Taco Bell, which now accounts for approximately 36% of our divisional operating profit, Q4 system sales declined 3%, driven by a five percentage point negative impact from the lap of the 53rd week. This was partially offset by 1% same-store sales growth and 1% net new unit growth. Taco Bell continues to reopen temporarily closed stores and ended Q4 with less than 50 temporary closures. Before delving into results, I'd like to congratulate the entire Taco Bell system for ranking number one in the Franchise 500, beating out peers as well as impressive concepts in other industries. In the words of Entrepreneur Magazine, which produces this list, Taco Bell was recognized for a well seasoned blend of innovative products and value prices, customers who are willing to follow the brand on wild marketing adventures and some of the most satisfied franchisees in the business. During the quarter, Taco Bell U.S. stayed focused on simultaneously building the brand over time and building sales overnight. First, we improved ease by expanding to additional aggregator marketplaces. Bolstered by dedicated media, these marketplaces helped delivery grow to a high single-digit sales mix for the quarter. Second, we launched a loyalty program with promotions geared toward customer acquisition and adoption. All in digital sales mix reached 12% for the quarter and about $1 billion for the full year 2020. We are very pleased with this progress on such essential components of building the brand over time. Third, we offered compelling and craveable product to drive sales overnight. The quarter began with the return of the fan-favorite, the $5 Grande Stacker Box, which had a strong performance mixing at 9%. Next we brought back the Toasted Cheddar Chalupa and saw a sales mix of 10%. We then rounded out the year with the grilled cheese burrito and Nacho's Party Pack, both having a positive sales impact. Now on to The Habit. Despite ending Q4 with 7% of Habit restaurants temporarily closed as well as COVID-related on-premise restrictions in California, same-store sales declined only 5%, a slight step back from the pace in late Q3. I'm pleased to say that we were able to fill much of this void through our digital ordering platform, which continued to perform well, constituting over 40% sales mix. Two permanent new menu items were added during the quarter to keep customer engagement high, including the Habits own amazing crispy chicken sandwich, as well as chicken bites. Now onto our unmatched operating capability. First at KFC U.S. with most of the sales occurring in the drive-through, our teams have successfully adapted to better support the drive-through lanes, as a result of transaction times during the quarter improves 16 seconds from Q4 2019. At Pizza Hut International, we're modernizing the team member experience through the launch of Phase 1 of our in-house intelligent coaching app called HutBot to improve shift level store performance. After launching HutBot and other process improvements in the UK, delivery times improved over six minutes and drove a 20 point improvement in customer satisfaction scores. There is lots of franchise excitement around HutBot and nine other markets have already rolled out this store management and coaching aid. Similar to KFC Taco Bell U.S. saw a record breaking drive-through performance and with consumer demand in our drive through at an all time high achieved its goal of completing a full year with transaction times below four minutes with the fastest quarterly average achieved in Q4. Next, our newest brand, the Habit Burger Grill aggressively rolled out off-premise solutions this year, such as pop-up drive-throughs and curbside pickup. Curbside in particular has continued to be well received by customers accounting for over 10% of total sales and about 50% of mobile orders. Now to our Unrivaled Culture and Talent growth driver, with the restaurant team member in mind, we held our first ever virtual global ops summit. What stood out the most to me was how the summit integrated key talent from our digital and technology teams directly into the unmatched ops agenda more than ever before, our young digital and technology team is not solely focused on the customer experience, but the team member experience as well through focus on building systems at scale, harmonizing platforms and leveraging an agile mindset. The goal is to unlock our pace of innovation and adoption for front and back of house platforms, which will be launched in a major market first, iterated until mature and then scaled globally. There was a lot of excitement across the globe for our newly developed technology solutions, and Chris will provide a few examples of specific platforms launching in the U.S. With that, Chris, over to you.

Operator:

We would now begin the question-and-answer session. [Operator Instructions] And the first question will come from David Tarantino with Baird. Please go ahead.

David Gibbs:

We're having some technical difficulties. One second, please.

David Gibbs:

Can you repeat the question, please. So that, team that didn’t hear, can hear it again, please?

David Gibbs:

Thanks for the question, David. And apologies to everybody for our phone dropping out. That's a first for us on an earnings call, but I guess – and everything has happened in the last 12 months, so why not that. As far as unit development, I know that's on everybody's mind. So just a couple of thoughts there. To the question of can we regain that 4% pace and is that in our cross hairs, and our goal certainly to get to 4% and beyond. And the answer is, certainly, yes. There's a lot of reasons why we're confident that we will get there over time. Our business model really has gotten stronger over the last 12 months. The shift to off-premise suits us well and improves our franchisees' economics. And obviously, in our open stores, we're seeing that show up as sales. Most of our franchisees are in good shape. They're coming out of this situation with – in good financial shape and they're ready to grow. Certainly, it's a more favorable real estate climate. And I will point out that in 2020, we actually opened over 2,400 gross units. So it's not as if the development pace at Yum! just disappeared. The challenge obviously with a lot of the closures, which we had for good reasons, things we've talked about over the years, wanting to close, particularly, Pizza Hut restaurants to strengthen our asset base. So we've got a lot of that behind us in 2020. And then, certainly, three out of our four brands grew last year and we got 3% growth in the global business when you exclude the Pizza Hut business. So all of those good proof points for why we can get back to 4%. As far as the timing though, I know the question is when and there is still some uncertainty on that, which is why we're not providing guidance on that number. We certainly can't be certain of the pandemic course. Since our last call, we've obviously seen flare-ups that have impacted our business. Yum! China talked about that as well last night. It's a challenging environment just to build stores. And there are markets that we want to get stores open and we're having trouble getting permits and getting the right people to construct the stores. And certainly, as we've changed our asset models, that has got our franchisees looking at making changes to the kinds of sites they pursue in some cases, the type of stores they build on those locations. All of that leads to some delays. And then, certainly, we all know in the development game in retail, it takes time to build the pipeline. And the fact that our pipeline was disrupted last year, we have to rebuild it. So confident that we can get back to 4% and beyond. Still not at a point where we're going to commit to a certain timeframe on that. But the mood is definitely one of confidence.

Operator:

Our next question will come from John Glass with Morgan Stanley. Please go ahead.

Chris Turner:

Thanks, John. This is Chris. Really good question. Digital has been such an important part of our resilience during the pandemic. We're proud to say that we had the $17 billion in digital sales for the year. A very significant increase over the previous year. And we're just very pleased with how digital is supporting the business. And we are, as we said, investing ahead in digital. We're finding other places to manage cost to help us to continue to fund those investments. And to your point, what we really care about in the long-term is that we earn a return on those investments. And so that gets at how we're thinking about the digital strategy. We want to continue to have the consumer-facing and team member-facing technologies be curated by the brands and be right for each individual market. The needs of a customer and the expectations for e-commerce in one market may be very different from another. So those front ends are tailored. But to your point, we are building common platforms underneath that. We don't need to replicate those common platforms multiple times. And so we gave a couple of examples earlier around how we're doing that. We mentioned that in KFC U.S. we've now introduced an internally built e-commerce platform. We will test that in a major market like KFC U.S. and then we will take it to other brands and other markets over time. Similarly, the POS example that we used on Taco Bell. Taco Bell is the first place where we'll implement that. And then we will customize and tailor that as a platform for other markets, both of those allow the front ends to be customized. So it's a blend of customer focus and platform underneath.

John Ivankoe:

Hi. Thank you very much. There's obviously a lot of discussion both in the U.S. and Europe, but I think specifically on the U.S. of kind of this major wave of restaurant consumption that will happen post-vaccine. And I wonder just kind of what your thoughts were on that? I mean, if you are prepared for significant shifts back to dine-in and obviously you have a lot of off-premise assets. I mean, if there are any examples around the world and maybe even cities within countries that are more or less kind of post-pandemic that you have a significant amount of stores that maybe you could talk about some experience of sales and the brands where you have some scale? Thanks for that color.

Operator:

The next question will come from Greg Francfort with Bank of America. Please go ahead.

Chris Turner:

Yes. So good question, and it's one that we think about on each element of the tech stack. And in general, we focus on ones where we think that element could provide a competitive advantage. The ones that we want to build and have control of internally. Others that are more of a support or enabler role are ones that we would work with third-party vendors through hopefully advantage commercial relationships where we bring our scale to bear. So it's always a blend, and we're always constantly reevaluating each of those aspects. But I gave a couple of examples a moment ago of ones where we've clearly said we need to have a differentiated proprietary platform on e-commerce and POS as a couple of examples that are so strategically important to the business.

Dennis Geiger:

Good morning. Thanks. Hope you're doing well, and congratulations to Tracy. Just wondering if you could talk more about the brands in the U.S. broadly. I guess, specifically given the momentum that you saw through 2020 and really to end 2020 given some new menu items this year across brands, already this year and I guess a good pipeline for the remainder of the year thinking about stimulus benefits, etc. Just curious if you kind of care to highlight any of the momentum that may have been continued into this new year? And just how you're thinking about the brands as the broader industry opens as we go throughout the year? Thank you.

Chris Turner:

Yes. I'll just add a little bit of color on sales trends to start the year. We've been pleased with how the brands have started the year given all of the elements that David mentioned. But I will try to provide a little more context for trends that we've seen. So first, if we take the U.S. specifically, in the first few weeks of the quarter, across all four brands, our same-store sales growth in aggregate was in the mid-teens. Of course, that strength was partly bolstered by the U.S. stimulus, which appears to be waning. Internationally, the sales trends have been softer. We've seen a slight deceleration from Q4 trends owing to the impact of regional COVID resurgences, plus the temporary closures due to COVID and local restrictions, plus some restrictions on operating hours in some of the restaurants. If you step back and you think about this quarter in total, there is a fair bit of uncertainty that makes it a bit unpredictable. We've got many different labs. The Lunar New Year moving, plus all of the COVID impacts in various markets around the globe but hopefully, that gives you a little more context for how the quarter has started.

Operator:

The next question will come from Jon Tower with Wells Fargo. Please go ahead.

David Gibbs:

Great. So I've got three questions, and I'll tick through those. So first on gross CapEx, yes, prior to the pandemic, we had gross CapEx around $225 million in a normal year. And so, yes, but the $250 million, there is a tick up there. It's really driven by two factors. One, we've now got The Habit as a part of the business and we still have a large equity store base there. And so we will be investing in development in The Habit. And second, smaller pieces driven by the digital investments. And of course, as we mentioned, we want to have at least $50 million in refranchising proceeds, north of that. We obviously have more stores in the portfolio now with the acquisition of Habit. So hopefully that explains that slight tick up in the gross number. Second, in terms of payback on technology investments. Yes, our focus is earning a return on those investments over time. However, the primary way in which we earn those returns is by those investments leading to higher sales growth and higher strengths in the business, which also aids net new unit growth. And that supports our franchisees, it supports us. That's the primary way in which we earn a return on those investments. And then your third question around drive-thru, obviously, off-premise has been such an important shift as we've gone through the pandemic. And yes, we continue to invest in the right drive-thru technology and experience in each of our markets. In some cases that does include digital menu boards. In other markets, we might say that's not the needed investment. But in virtually all cases, we want it to be an easy fast experience for our customers. And we continue to focus in each brand on making sure that experience is terrific and enabling it through the right technologies for the particular market.

Operator:

The next question will come from David Palmer with Evercore ISI. Please go ahead.

David Gibbs:

As far as Pizza Hut goes, David, you broke out – broke up a couple of times. I think I got the gist of your question. On the U.S. business and the brand, we're really pleased with the progress that Kevin under his leadership, but also the team that we brought in from a brand and a marketing standpoint; David Graves and George Felix have done an amazing job of reinvigorating the innovation pipeline and bringing the brand forward to consumers in a way that's really resonating, and that's why you're seeing the great results there. We do think, as you've seen with the launch with the Detroit-style pizza more recently. We do think that there is an important role for innovation to play in that brand. And I think those guys are spot on the way they're bringing it to life. So we're confident in the brand coming to life. As we've always talked about, the challenges are more around the asset base than it is about consumers' loves for the brands or the products that we serve. On the international side, it's obviously a different story. The assets are in better shape, but they skew more toward dine-in. And you're seeing that shift in the asset base to off-premise. Even the dine-in stores themselves are now in many cases offering delivery, coming up with innovative solutions to leverage technology on the dine-in experience. So I think that will continue. And yes, we will be helped at on the international side when we get past the pandemic and people return to the stores. But the base model that we have at Pizza Hut both internationally and domestically of building a delivery carry-out unit is a low-cost asset to build that usually gets very high returns, is attractive to our franchisees. And that base model and the unit economics of it bodes very well for the future of the brand internationally and domestically.

David Gibbs:

Well, thanks everybody for your time today. Obviously, in summary, 2020 was a challenging year across almost every dimension. But we feel really good about the massive progress we've made in so many ways, progress we wouldn't have made without the challenges of 2020. I'll just end on a high note. If you didn't pick it up in the release, we opened our 25,000th KFC in Q4, ended the year with 25,000 restaurants. If you look back just five years ago at the end of 2015, we had less than 20,000 restaurants. KFC in 2020 opened – had 4% net new unit growth. Even in the toughest of times, this brand is growing. It's our biggest brand. And that kind of 5,000 unit growth over a five year period bodes well for the future. We've still only scratched the surface of penetrating the world with KFC. Probably most importantly though, 2020 was a year in which our culture and talent was a differentiating factor in getting through it as successfully as we have. And I was so proud of the way our franchisees and our employees took care of our customers and our communities, partnered together to pivot the business and we clearly have emerged stronger, and there is a lot of enthusiasm and excitement around the world about the growth ahead of us. Thank you for your time.

Operator:

Good morning. Welcome to Third Quarter 2020 Yum! Brands Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Keith Siegner, VP of Investor Relations, M&A and Treasurer. Please go ahead.

David Gibbs:

Thank you, Keith, and good morning, everyone. I want to start by saying thank you to our entire global system for exceptional execution of our Recipe for Growth and Good strategy during the quarter. Our employees, franchisees and restaurant team members are successfully adapting to this year’s ever-changing environment, while also accelerating progress on our digital and technology journey. We’ve deepened collaboration around the world and across functions and brands to bring customers our delicious food through safe contactless methods, while also caring for our team members, employees and communities. For that, I am incredibly proud. These efforts led to encouraging third quarter results, including a return to year-over-year core operating profit growth. Our restaurants that had temporarily closed because of the pandemic continued to reopen throughout the quarter. And despite many of our restaurants operating with only a portion of their normal sales channels, same-store sales growth in our open stores was approximately flat in aggregate. While 2020 has presented many challenges, our portfolio of brands has proven resilient. Our balance sheet and liquidity position are strong, franchisee health has improved and we’re incredibly well positioned to drive global growth and maximize stakeholder value for years to come. Our Recipe for Growth using our four key growth drivers continues to guide our long-term strategy. So I’ll start with an overall review of third quarter results and use a few examples to illustrate the power of our relevant, easy and distinctive, or R.E.D. for short; unmatched operating capability and unrivaled culture and talent growth drivers. Then Chris will share more details of our Q3 results, including some discreet one-time impacts, our bold restaurant development growth driver and our healthy liquidity position. First, Q3 results. Overall Yum! system sales grew 1% with a 2% increase in net unit’s year-over-year, partially offset by a 2% same-store sales decline. COVID continued to impact the business both in terms of temporary closures of restaurants and limitations on the use of dining rooms, which some of our markets heavily rely upon. Despite the challenges related to COVID, we delivered core operating profit growth of 7%. This strength can be attributed to strong growth in our Taco Bell division and an improvement in franchisee health. Our third quarter same-store sales declines were once again, primarily driven by temporary closures. You may recall that as of our last earnings call we had less than 2,500 units fully closed. This number decreased to approximately 1,100 by the end of the quarter. And today it stands at about 1,000, which means roughly 98% of our system is open in a full or limited capacity. Assets located in malls, transportation centers, airports and the like continue to be pressured, making up many of the closures. Geographically, Pizza Hut at U.S., Latin America, Asia, and India make up the majority of these closures, but the situation remains dynamic and largely dependent on government responses to COVID based on local conditions. At the end of the quarter, we continued to have a significant number of our open restaurants, subject to dining room closures, or other limitations on access. However, as I mentioned earlier, despite the drag from these limitations, our off-premise channels aided by digital, enabled our open store base to deliver same-store sales that were flat for the quarter. This was an improvement of a few points from what we saw in the second quarter. Now let’s talk about our four R.E.D brands. Starting with KFC division, which now accounts for approximately 48% of our divisional operating profit; Q3 system sales declined 1% as a 4% same-store sales decline was partially offset by 5% net new unit growth. KFC continued to reopen temporarily closed stores and ended Q3 with about 99% open in a full or limited capacity. The rapid recovery at KFC has largely been driven by off-premise capability, acceleration of digital and the reopening of temporarily closed stores. Many markets have started to show improvements, though the pace is varied. During the quarter, markets with robust, off-premise, and/or digital capabilities excelled, including strength in the U.S., the UK, Australia, Japan and Canada. Many of these markets delivered sales performance above their pre-COVID levels, and collectively represent about 30% of the KFC global portfolio. KFC continues to innovate on our core menu, including launching great products like the Famous Chicken Chicken Sandwich in Canada, and the Slab in Australia, and adding new bundles that offer great value for off-premise family dining. Importantly, markets such as Africa, much of Asia, parts of Europe and the Middle East started to show sequential improvement during the quarter by growing their off-premise capabilities to partially offset their dine-in reliance. KFC’s most impacted geographies where markets where most of our temporary closures remained elevated, including Latin America and Caribbean, Asia, India, and the Middle East. These markets also tend to be are more dine-in-centric and had lower consumer mobility during the quarter. KFC U.S. had another fantastic quarter with 9% same-store sales growth owing to the continued strength of our group occasion business and digital. Our KFC U.S. drive-thru sales grew about 60% year-over-year with our largest day part growth occurring at midday and continued strength during the dinner day part. We also hit a delivery milestone with about 80% of KFC’s in the U.S. now delivering many through multiple aggregator partners. Moving on to Pizza Hut, which now accounts for approximately 18% of our divisional operating profit, the division reported a Q3 system sales decline of 4% with a 3% same-store sales decline and a 4% net new unit decline. Global off-premise same-store sales grew mid-teens year-over-year, which is clearly encouraging. COVID is highlighting how important the future of off-premise is and we intend to use this momentum to further advance the off-premise category and continue to decrease our dine-in asset footprint. Please note that as we lean in on this opportunity to transition the asset base, we may continue to see closures present the near-term headwind to overall division net unit growth in Q4 and into next year. During the quarter, Pizza Hut continued to reopen temporarily closed stores and ended Q3 with about 96%, at least partially open in a full or limited capacity. Express units continue to be pressured, making up many of the remaining closures. The 9% same-store sales decline at Pizza Hut international for Q3 marked a significant improvement from Q2 lows, but the continued softness was largely a result of markets with substantial dine-in footprints such as China, parts of Asia, Central America and Europe. On the other hand, our off-premise focused markets continued to see strength. Canada, Japan, Taiwan, and Australia, all posted strong results, while the UK delivery business and South Africa saw improved momentum during the quarter. Importantly, our off-premise channel generated another quarter of positive 10% same-store sales growth, giving us confidence that our off-premise strategy is working and will be the foundation of the long-term growth story. Similarly, Pizza hut U.S. had another positive quarter with same-store sales growth of 6% with our off-premise channel generating 17% same-store sales growth, despite a 4% drag from closures and sales headwinds in express units. In addition to digital and convenience driving sales, we promoted abundant value with our $10 tastemaker, followed by a $11.99 Large 3-Topping Stuffed Crust Pizza, and $12.99 Double It Box. As for Taco Bell, which now accounts for approximately 35% of our divisional operating profit, system sales group 5%, driven by 3% same-store sales growth, and 3% net new unit growth. Taco Bell continued to reopen temporarily closed stores and ended Q3 with about 80 closures. And even more impressive was the profitability delivered by Taco Bell in part due to a 400 basis point increase in restaurant margins, a testament to the strength of the brand and the operating capabilities of the team. We expect these margins will likely return closer to historical levels as check averages normalize, dining room patronage increases and value focus moves to balance abundant value with price point value. In the U.S., Taco Bell’s focus on abundant value offerings continued as the primary theme throughout the quarter. We also reintroduced innovation beginning with the debut of the Grilled Cheese Burrito, which quickly became a customer favorite mixing at 9%.This was followed by the $5 Grande Nachos Box, and $1 Nacho Crunch Double Stacked Taco. Taco Bell also continued to focus on a faster and easier customer experience by expanding aggregator partners and digital reach while breaking records in drive-thru times. Drive-thru demand skyrocketed this quarter as Taco Bell served over 30 million more cars and was 17 seconds faster year-over-year. During the quarter, we also unveiled our new Go Mobile asset design in the U.S. These assets will have a smaller footprint with a big emphasis on digital and off-premise with dedicated mobile pickup lanes and bellhops for outside in-person ordering. Better experience for customers and better economics for franchisees is a winning formula. Stay tuned for more about this exciting development opportunity. Now on to the Habit. We continued to reopen temporarily closed stores and ended Q3 with 97% of Habit restaurants open in a full or limited capacity. Same-store sales declined only 3% as effective off-premise solutions basically offset the dine-in sales mix loss, which was over half of sales pre-COVID. Supporting this, digital sales maintained second quarter’s 40% mix, even with dining rooms and patios reopening. The Habit restaurants with drive-thru capabilities are performing exceptionally well, and they’re yet another proof point for us as we continue to position the brand to fit the needs of consumers today. This is a perfect segue to our unrivaled culture and talent growth driver. When we first approached the Habit team about joining Yum!, one of our biggest takeaways was their operational excellence, consistently serving delicious quality food to customers. Now that they are part of Yum!, it’s clear that they fit right in with our culture as well. We’re extremely pleased with Russ Bendel and the team’s ability to pivot. They joined our organization during this unprecedented time and jumped right into action, making sure that their food was accessible and safe, low contact and off-premise environment. Many of you have asked us about our interest in refranchising the Habit. Interest is extremely high, but we plan to be judicious with the approach and timing as we refine the off-premise aspects of the model, likely picking a few cornerstone partners to begin with. Now on to our unmatched franchise operating capability. We’ve continued to accelerate our digitally enabled off-premise capabilities across the globe. We now have over 35,000 restaurants offering delivery around the world, representing an 11% increase year-over-year, in part driven by expanded aggregator partnerships. In addition to Grubhub, we now have order and delivery agreements in place with numerous scale delivery aggregators in both the U.S. and around the world, expanding our overall accessibility to customers through whatever channel they prefer. Our digital sales mix sustained second quarter’s 30% of system sales and an 11-point year-over-year improvement. To put that into context, during the quarter, digital sales were approximately $4 billion, a $1 billion step up from Q3 2019. Our brands working in concert with our Yum!’s central technology team have shown remarkable agility and will continue to unlock sales growth over the near- and long-term. To that end, we’re optimizing our resources, reallocating them towards critical areas of the business that will drive future growth with strategic initiatives that include accelerating our digital technology and innovation capabilities to deliver a modern world-class team member and customer experience and improve unit economics. Like many companies, optimization includes managing expenses through a number of levers, including reduced travel, elimination of large meetings, freezing open roles, optimizing current roles, no 2021 salary increases and offering an early retirement program in the U.S. Of course, over time, we’ll continue to invest in new roles across Yum! and our brands to support the most important areas of growth in our company. We’re confident in the resilience of our highly diversified global business model and believe that investing in things that are integral to our growth and social impact strategy will help us emerge as an even stronger company. During the quarter, we published our 2019 Recipe for Good report. Since our last report, we have made significant progress, advancing our sustainability agenda globally with expanded efforts to offer customers more balanced choices, including plant-based and vegetarian menu items, and continuing action on climate change by increasing efficiencies in our restaurants and corporate offices and making progress on key deforestation commitments, including paper, palm oil, beef, and soy. And as we mentioned last quarter, we are stepping up our investment in Yum!’s new social purpose to unlock opportunity in our people and communities, while championing equity, inclusion, and belonging across all aspects of our brands and franchise business. With that, Chris, over to you.

Operator:

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Dennis Geiger from UBS. Go ahead.

David Gibbs:

Thanks, Dennis. Look, the Taco Bell brand performance in Q3 is obviously something we’re very proud of. Mark King and his team have done an amazing job of pivoting in this environment to meet the consumers’ new needs. So you touched on a couple of other things that they’ve done – to do so, but the ability to embrace larger meals – family meals, they’ve seen a doubling of their party size meals. They’ve obviously rolled out a lot of tech, rolled out a loyalty program to connect better with consumers and giving them access to delivery. They’ve added delivery partners as the quarter went on and they’re now on multiple platforms. And I think Taco Bell always has their finger on the pulse of the consumer. That’s what makes the brand great, the way they connect with consumers. They’ve recognized that this is – we’re really in an environment where the food is going from something as fuel to being something a little bit more like entertainment. This is an environment where people are now comfortable with how things are going to be for awhile and they’re looking for a little bit more excitement. That’s why you saw the success of something like the Grilled Cheese Burrito that got rolled out and was well received by consumers. So across multiple fronts, the brand is really connecting well with consumers and excited about the progress they made. Obviously, the margin progress they made in the quarter is somewhat related to the limited hours. The menu simplification that you mentioned, Dennis, was also helpful in that regard. So I think they’re getting through this in an admirable way.

Operator:

Our next question is from John Ivankoe from JPMorgan. Go ahead.

Chris Turner:

Hey, John, this is Chris. Good question. Look, I think I’ll start a little bit more broadly. As you think about the development journey, we’ve got three of our four brands, where we’ve had positive net new unit growth globally so far this year. Taco bell is one of those. We remain very confident in the long-term potential for development in Taco Bell around the globe. In certain markets, the sales in this situation have been impacted, but there are other markets where the business has done quite strongly through COVID, including all of the things that are supporting us around the globe in terms of shift to off-premise and digital and delivery, those trends have existed in the Taco Bell international stores. And so in the long run, we continue to remain confident in Taco Bell’s international growth as a pillar of our overall unit development engine. Nothing’s changed there in the long run. It’s just the uncertainty on the timing of us getting on that track.

Operator:

Our next question is from David Palmer from Evercore ISI.

Chris Turner:

Thanks. I’ll take your first question and turn it over to David for your second question. Yes, during the quarter we did sell our position in the Grubhub shares, all 2.8 million shares for a total of $206 million. That doesn’t reflect anything about our view on the delivery space in general. As David mentioned, we’ve expanded our relationships with aggregators. Our overall thesis is we want to be where our consumers want to do business with our brands. And if that’s through a delivery channel with an aggregator, we want to be there. And with the relationships we continue to bring online in the U.S. and around the globe, we’re off to solid starts on those. It’s also a story of leveraging our scale. When we bring our restaurants under those platforms, the economics improve for the aggregator, and we’re able to get advantage economics for our franchisees and for Yum! when we do it. So we think it’s a way to drive profitable growth for the system.

Operator:

Our next question is from Brian Bittner from Oppenheimer. Go ahead.

David Gibbs:

Great. Good question. Look, if we think about the overall development picture, as we’ve said before, we remained very bullish on the long-term opportunity for Yum! And we think it’s, as we said, a matter of when, not if, we get back to that long-term unit growth algorithm. The macros are promising. Our brand stand tall in this type of environment, they stand for value which pivoted to off-premise. So that’ll drive the top line for the stores. Our teams are developing prototypes that are fit for this with lower footprint sizes that have great digital capabilities and enhance even further our off-premise capabilities. And in certain markets, there likely will be some real estate tailwinds from a real estate cost standpoint. And our franchisees have been growth minded, historically, and they’ve shown their resilience through this situation and we’ve got great development teams. And even if you just think about what’s happening this year in the pandemic, there are some very positive signs. As I mentioned earlier, three of the four brands have grown their units this year. And if you think about KFC and Taco Bell alone, we’ve had 540 net new units this year, which is three, three quarters, 1.5 of net new unit growth. Even at Pizza Hut, we’re working through the asset transformation that David mentioned, we’ve had 340 gross opening so far this year. So it indicates that our development teams and our franchisees are working hard there. So all of that I think is what gives us the long-term confidence. I’d love to say that we’ll get there as soon as we can. And our teams are going to be striving to do even more as you described, but we’re confident in the long run. We still have uncertainty about the timing of it. And that’s why we just can’t commit to the exact timing of when we get back to that algorithm. You’ve seen the news from Western Europe over the last couple of days. That’s an example of the types of things that are driving the uncertainty on exactly how this will play out. And that’s why we just can’t provide specific guidance on the timing or the exact number.

John Glass:

Thanks. Good morning. Two questions. One is on Pizza Hut. Can you just help us understand what the system sales impact would be for the closures? Either the year-to-date, the 5% closures or decline in 5%, what was the system sales? I assume these are lowered volume units. And if you think about the portfolio over time, is there a way to think about the system sales impact versus just a unit closure, so we can try to understand the financial impact? And then Chris, can you also just on the bad debt recoveries, where are you now? So is this an expected fourth quarter benefit again? And what’s kind of the order of magnitude that’s still outstanding recoveries versus a normalized level to get back to sort of what you’re fully up to normalized levels of collections?

Operator:

Our next question is from Sara Senatore from Bernstein. Go ahead.

David Gibbs:

Yes. Thanks, Sara. And part of your question broke up at least for us here, but I think I got it. On the Taco Bell mix and the impact from the impact to ours, our breakfast business, as you said, typically mix is around 6%. I think that mix is down to four now as a number of people have stopped serving breakfast, although it’s still in more than half of our stores. And we obviously we are committed to breakfast long-term and expect to be back into that with all stores as time goes on. I do – as far as the impact to the business, it’s a point or two of same-store sales impact depending on how you want to cut it. So it’s nothing that we can’t overcome, obviously, as we pivot to other means of serving customers. And then the question on acquisitions, I think we mentioned it in the speeches, I’ll repeat it. We’re really pleased with the acquisitions that we’ve done, whether it’d be the QuikOrder acquisition that we did on the technology side a couple of years ago. We recently bought Heartstyles, Collider, a consumer insights company. Now these are smaller acquisitions, but more recently obviously the Habit Burger Grill. It’s worth really taking a look at what they have done in this environment. They went from over 50% of their sales coming from dine-in and another good portion of their sales coming from carry out in the restaurant to pivoting almost everything coming outside the restaurant and recovering to nearly flat. I think they’re basically flat in the stores that are open. So I think that’s an incredibly positive data point for a brand that we believe is on the rise. We have lots of interests in the franchise community from it. But we’re in no rush to do another acquisition. We want to digest Habit, get that established, get the right partners around the world and get the growth going there. And if we continue to see the kinds of results that we think we’re going to see and that we have seen from them that would be obviously a positive data point as we think about other similar type acquisitions down the road.

David Tarantino:

Hi, good morning. My question is on G&A. I just want to make sure I understand your comments there. What is your long-term G&A outlook? Is it still a target of 1.7% of system sales? And I guess the nature of my question is I think you talked about achieving some efficiencies in the current environment about reinvesting. Just want to try to reconcile that on your long-term target.

Operator:

This concludes the question-and-answer session. I would now like to turn the conference back over to Chris Turner for closing remarks.

David Gibbs:

Yes. Thanks for everybody’s time today. Obviously, we’re excited and proud of the results that we put up in Q3, showing strong sequential improvement on the recovery from Q2, driven by the things that we wanted to see. Our ability to adapt and pivot to off-premise, embrace digital, the billion dollars of extra digital sales in the quarter, just like we did in Q2 is incredibly encouraging. But yet, we know it’s a fluid environment, and that as we’re seeing in Europe, it’s just not an environment where we can predict and guide for 2021. We do have confidence in our team based on how they recovered so far, and that whatever thrown our way, we’ll be able to pivot to it. As we’ve gone into Q4, the trends from Q3 have continued, but we know that it’s an uncertain environment and that we’ll be faced with more challenges and excited about the way the business can pivot, meet those challenges and continue to thrive. So thank you for your time today.

Operator:

Good day, and welcome to the Yum! Brands, Inc. Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Keith Siegner, Vice President, Investor Relations, M&A and Treasurer. Please go ahead.

David Gibbs:

Thank you, Keith, and good morning, everyone. I want to start by thanking and recognizing our employees, franchisees and restaurant team members around the globe. They have adapted to the incredible challenges of 2020 with remarkable agility bringing our delicious, affordable food to customers in a low contact manner. As a result, we are well positioned to leverage our scale and capabilities to generate profitable system sales growth in the new customer environment. On the foundation of our resilient, highly diversified business model, we are driving our recipes for growth and good to emerge a stronger company for all stakeholders. Our Recipe for Growth, using our four key growth drivers, continues to guide our business strategy. So I'll start with an overall review of the second quarter and use a few examples to illustrate the power of our relevant, easy and distinctive, or RED, brands unmatched operating capability and Unrivaled Culture & Talent growth drivers. Then Chris will share more details of our Q2 results, our bold restaurant development growth driver and our healthy liquidity position. First, Q2 results, the quarter was significantly impacted by COVID-19, the primary driver of our 25% core operating profit decline. Overall, Yum! system sales declined 12% with a 15% same-store sales decline, offset by a 3% increase in net units year-over-year. The impact on our sales in each of our market's dependent on the timing, severity and duration of the outbreak as well as our reliance on dine-in sales in the market. Overall, our sales declines were primarily driven by temporary store closures, which peaked in early April at about 11,000 restaurants. We then experienced a consistent pace of reopening until our June 10 8-K filing when approximately 5,000 units or 10% of our global system remained close. I'm excited to share that closures have now fallen to less than 2,500 units, which means roughly 95% of our system is open for business in full or limited capacity. The remaining closed stores are dispersed around the globe with about 70% located in balls, transportation centers, airports and the like. We're encouraged that, generally speaking, when our stores are open, customer trust and demand are high. This is true even though the majority of our dining rooms have been and remained closed, highlighting the importance of executing the off-premise occasion well and demonstrating the resilience of our business model. Our brands are becoming even more RED by leveraging consumer insights to adjust operations, menu options and marketing and by digitally enabled off-premise capabilities across the globe. With our focus on delivery carryout in digital, we have passed some tremendous milestones this year. We now have over 34,000 restaurants offering delivery around the world, representing a 13% increase year-over-year, in part driven by expanded aggregator partnerships. Our digital sales mix has increased dramatically to over 30% of system sales, a 15-point year-over-year improvement. To put that into context, during the quarter, digital sales were approximately $3.5 billion, a $1 billion step-up from Q2 2019. Our brands, working in concert with our Yum! Central technology team, have shown remarkable agility and will continue to unlock sales growth over the near and long term. That's a perfect segue to our 4 RED brands. Let's start with KFC Division results. Q2 system sales declined 18% as a 21% same-store sales decline was partially offset by 6% net new unit growth. Encouragingly, trends improved from early April troughs, fairly in line with the rate of store reopens. KFC started the quarter with 5,000 restaurants temporarily closed; peaked in mid-April with about 6,000 closures; and following a massive effort to reopen, ended Q2 with about 95% of stores opened. Our performance in open stores is primarily linked to off-premise capability within a given market. We saw consistent strength in Canada, the U.S. and Australia. And after government-mandated closures eased, we saw resiliency in Germany and the U.K. All of these markets have good drive-thru coverage, strong off-premise capabilities and robust digital foundations. Western Europe, in particular, KFC France, which was hit hard early on, led the way in reopening markets where all channels and restaurants have been closed due to lockdown. The local teams took action to keep our team members and customers safe while working with government bodies to ensure that we were among the first QSRs to reopen. In the U.S., KFC is serving the right occasion at the right time, fulfilling families' needs for delicious meals to take home and unpack around the dinner table. The timing of our launch of kfc.com for pickup and delivery, the addition of new aggregators and our bundled bucket meals that travel well all contributed to a fantastic quarter. We recorded the highest average sales per store in the brand's history during a week in early May, and we finished with 7% same-store sales growth for the quarter. Moving on to Pizza Hut, the division reported a Q2 system sales decline of 10% with a 9% same-store sales decline and a 1% net new unit decline. Pizza Hut entered the quarter with over 3,500 restaurants temporarily closed due to the COVID-19 pandemic, with same-store sales growth trending in line with temporary closures. Closures then peaked in mid-April with about 4,000 restaurants temporarily closed. By the end of Q2, about 87% of Pizza Huts were open, with Pizza Hut U.S. Express stores representing half of the remaining closures. In general, markets that operate a diamond segment have significant stores in malls or transport hubs or have Express units have been most impacted by closures and government restrictions. While the effect has been partly offset by increases in delivery and carryout demand, the net impact globally has been a headwind. At Pizza Hut International, temporary closures peaked at approximately 24% in April. Importantly, certain markets, including Canada, Japan and Australia, closed the quarter with positive results, though this was offset by markets with substantial dine-in and Express footprints. Those markets include the U.K., much of Europe and Central America, the Middle East and select markets in Asia. In aggregate, off-premise channels generated a positive 10% same-store sales growth and represented 80% of total sales internationally. At Pizza Hut U.S., we balanced value and innovation as we introduced the $9.99 large 3 topping deal and premium products such as the Big Dipper and the Big Dinner Box. Same-store sales grew 5% in the second quarter, and I'm excited to share that in early May, the U.S. recorded its highest average sales week for delivery and carryout in the past 8 years. Our off-premise channel generated 21% same-store sales growth when excluding the drag of closed Express stores or 16% same-store sales growth when including the drag of closed Express units. During the quarter, we launched our contactless initiative by adding additional pickup and payment options for customers. Since March 2020, Pizza Hut has served close to 20 million contactless digital orders. We've also welcomed several million new and reengaged customers to our Hut Rewards loyalty program. At Taco Bell, system sales declined 6%, driven by an 8% same-store sales decline, partially offset by 4% net new unit growth. Taco Bell temporary closures peaked at 500 at the end of Q1 and had reopened 100 units by mid-April. By the end of Q2, about 97% of Taco Bell units were open. At Taco Bell U.S., we pivoted our marketing to promote group bundles, drive awareness of contactless drive-thru and delivery and thanked our fans, heroes and communities by giving away free Dorito Locos tacos. We coupled this with abundant value offerings such as cravings, boxes and party packs and our all-new at-home Taco bar, which supported record-breaking sales on Cinco De Mayo and further established Taco Bell as a destination for groups. And to adjust to widespread dining room closures, our company and franchise partners doubled down on world-class operations as Taco Bell served an additional 4.8 million cars through our drive-thruns while achieving an 18-second faster drive-thru time year-over-year. Taco Bell has always been an easy brand for customers to access. And now with the ability to order on the Taco Bell app and pick up through our world-class drive-thru, they are redefining the easy part of RED. During the quarter, we added over 1 million new users to our active e-commerce platforms through our mobile app and tacobell.com. These operational improvements and increased focus on digital and delivery have made an impact in driving profitable growth for our franchisees, and we are extremely proud of our operators for making it happen. Following an eventful first full quarter as our newest brand, I'm pleased to share details about the Habit Burger Grill. With the majority of the Habit's assets being in line or end cap units, COVID-19 significantly impacted Habit sales just as we were closing on the acquisition in mid-March. With over half of sales typically coming from dine-in and temporary closures running at approximately 10% of habit's throughout the quarter, they faced a massive headwind. Impressively, from the April sales lows, the Habit quickly turned things around by shifting focus to off-premise. They ended Q2 with an 18% same-store sales decline, mostly due to temporary closures, and recent trends for open stores are flat to slightly negative. During the quarter, the Habit built customer awareness of new access options and shifted marketing to focus on family meal bundles such as the variety meal that can feed a family for only $30. Digital ordering via mobile and kiosk represented 40% of sales during the quarter. And importantly, each month this year, we have seen a steady increase in the number of app downloads. I've been incredibly impressed with the resilience of this brand, the agility of the entire Habit team and the know-how sharing taking place between Habit and our legacy brands. None of us could have imagined how Q2 would play out when we made the decision to acquire The Habit, but I'm more confident than ever that the brand and the team will create a new long-term growth opportunity for Yum!. I'd now like to spend a moment on the current state of the business. Of course, there remains incredible uncertainty in the global macro outlook owing to COVID-19 and its implications, as evidenced by the different trends we see in each of our 290 brand/country combinations. Due to this uncertainty, we must remain vigilant. That said, we are encouraged about our continued store re-openings, the general financial health of our global franchisee base and our own strong liquidity and balance sheet. Just as importantly, same-store sales trends for open stores stabilized in June, just a few points short of flat. And despite the majority of our dining room still being closed, these trends have continued into July. Finally, earlier this year, we elevated our Recipe for Good to serve as our road map for Yum's global strategy for citizenship and sustainability. That recipe is built on the three key pillars of food, people and planet. Those of you familiar with Yum! know we have always been a people-first company committed to ensuring the safe, welcoming and inclusive environment for our customers and employees. But recent tragedies across the U.S. have revealed this dark and unacceptable reality and have shown us that we must do more. To that end, at the end of June, we announced our unlocking opportunity initiative, with a $100 million commitment over the next 5 years, of which $50 million was funded in the second quarter. This initiative will promote equity and inclusion, education and entrepreneurship for our employees, frontline restaurant teams and communities around the world and will serve as the cornerstone of our Recipe for Good going forward. I look forward to providing further updates on our progress on unlocking opportunity as we bring it to life. With that, I'll turn it over to Chris.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from John Glass of Morgan Stanley.

A – Chris Turner:

Yeah. Good question, John. Obviously, unit development and growing our network has been an important part of our algorithm. And we think in the long-term, we remain confident that it will be an important part of Yum!'s story. Obviously, given the uncertainty in the near-term, we're not sure when we'll get back to that. But if you think about the factors that actually are driving this conversation, it depends really on where you are around the globe. We've got certain markets where sales are strong. Our brands have proven their resilience, and our franchisees are forward focused. You heard Yum! China last night reaffirm their units for the year. And then we've got other markets at the other end of the spectrum where we still got some closures or -- and where sales are more impacted by COVID. Those franchisees are focused on just basic operations right now. So the discussions really depend on where you are around the globe. But in general, we believe the investment case for our restaurants will be even stronger going forward. Our brands have proven resiliency. We believe real estate costs should be more favorable going forward. Our digital capabilities allow us to pivot to off-premise, and we'll obviously be looking at optimizing our footprints for that environment. So we feel really good about the investment case.

Keith Siegner:

Next question, please

Gregory Francfort:

Hey, thanks for the question. You just touched a little bit on Yum!'s willingness, I guess, to maybe invest in some of these franchisees. And I guess the question comes back somewhat to the NPC situation. And I guess, if you could put some capital in and maybe accelerate some of the asset changes there. Is that something Yum!'s considering? Or is that something that will be off the table at this point? Thanks.

Keith Siegner:

Thank you. Next question, please.

Sara Senatore:

Thank you. I was wondering if you could maybe talk about Pizza Hut and KFC in particular. They would – I characterize them as maybe some of the few beneficiaries, if you will, of the changes in the consumer behavior during the pandemic. Both I think comping better. Certainly, the off-premise business repeats that, and we've seen it in a long time. Can you just talk about how you think about retaining some of that strength, specifically the two dynamics I'm interested is what happens when people are able to go out, eat again? Your dining rooms are open. How much of that do you think you'd give back? And then also to the extent that you've taken market share, how do you keep that Pizza Hut, x closures and dine-in comps, I think, over 20%, which is actually pretty consistent with what we've seen from other large pizza chains who have historically, I think, led Pizza Hut in many quarters. So I guess, how do you capitalize on these things? Or can you over the long term? Thanks.

Keith Siegner:

Thanks. Operator, next question please.

John Ivankoe:

Hi. Thank you and apologies, I went through the release, obviously, very quickly. First, the Taco Bell store margins really did jump off the page, considering the comp that you guys reported. Can you provide some color on that in terms of like what happened? And what out of that margin is actually sustainable? And if there is a kind of a new Taco Bell company store margin coming out of this is the first question. And then secondly, if I may, there's obviously been a lot of news in disruption in terms of third-party delivery. Can you comment on -- in the U.S. business specifically and around the world, if you'd like to, your ability to grow delivery dollars year-over-year? And how some potential changes in the relationship might benefit or, I guess, impact your business in some way? Thank you.

David Gibbs:

Yes. The other point about delivery as much as we've seen delivery growth, we've also seen a lot of carryout growth with options like curbside pickup in a contactless way, which is obviously great for our operators because it's a high-margin business when you can do -- carry out in that way. So the growth that we're seeing, yes, delivery is one of the drivers. But carryout is very much growing at the same kind of pace.

Operator:

The next question comes from Dennis Geiger of UBS. Please go ahead.

Chris Turner:

Yeah. Look, Taco Bell was a bright spot for the quarter. If you look at -- they're basically flat on a two-year basis, and they made tremendous progress during the quarter. If you just look at our previous filings from sales results, you can see that they probably had the best results moving from April forward through the quarter. If you think about what -- in the U.S., for example, Taco Bell, with almost one-quarter of their sales is dine-in and the late night and breakfast business, they were impacted the most. So they had the most ground to make up. And now we've got into July, and Taco Bell, along with the other two big U.S. brands are all positive. So that's enormous progress given the hit to their business. It's due to the fact that they've pivoted really well, leveraging the option -- the menu that consumers love with items like the Grilled Cheese Burrito, that's obviously proven a hit. And the loyalty program, as you mentioned, which recently launched still in its infancy, but obviously has a lot of upside. The margins actually were somewhat of a record, tying a record for us for store-level margins in the quarter. So when you add all that up, it's the brand with a huge amount of momentum as we come out of the quarter. I'm very excited about the future for Taco Bell. The relationship with the franchisees, as you mentioned, couldn't be more positive. They've been great partners working through all these challenging times. Again, they were hit the most at the beginning of this pandemic. So they were the ones that were in some ways in the U.S. in the most dire straits, but quickly partnered together with the franchisees. Mark King and his team have done an amazing job to get the business on much more solid footing and with momentum right now.

Operator:

The next question comes from Andrew Charles of Cowen and Company. Please go ahead.

Chris Turner:

Yeah. Look, the return to 4% is not a matter of if, it's just a matter of when. And we have 2,000 franchisees around the world. The vast majority of them are coming out of this in good shape. But we have pockets where franchisees are still challenged. We still have a couple of thousand stores that are closed with our bigger presence in emerging markets and emerging markets struggling more to deal with the pandemic in their countries. That's a challenge, which all adds up to making it very difficult to predict exact timing on when we'll get back to our long-term algorithm. But again, there's so many positive things when it comes to development in terms of availability of sites, how resilient our business model has proven, which is obviously attractive to investors that want to invest in this space; the partnerships that we've developed with the vast majority of our franchisees to get through this together; and the positive feelings that creates and the interest in working together long-term to grow the brand. So it will vary by market. It will vary by franchisee in terms of when we get back to the algorithm. Obviously, Yum! China is already there, as they announced last night, which is very encouraging.

Operator:

The next question comes from Peter Saleh of BTIG. Please go ahead.

Chris Turner:

Yeah. Just taking the last one first on the dining rooms. The reality is that we've got 24,000 dining rooms...

Chris Turner:

That are close today. So – and in the U.S., we really just have a fraction of our dining rooms open. So when you look at the results that we're getting, when you talk about our – excluding closed stores, we still have a lot of stores that are opened with closed dining rooms, it's really quite impressive that we're able to get sales globally back to approaching flat, without those dining rooms in the majority of our stores. So it's not critical to our success. It's obviously something that we will return to over time when it makes sense. And the teams have developed all the right safety protocols to do that, as you can imagine with plexiglass on the front counter and cleaning captains in the dining room to make sure that we clean high-touch points every 30 minutes, all the different things that you would imagine, we – company – the largest restaurant company the world would develop to ensure the safety of our customers. But the dining room piece is really something that we've been able to overcome quite successfully in most markets. Certain markets, obviously more reliant on it, Pizza Hut dine-in restaurants, obviously, in some cases, very reliant on it. So it does – the story does vary. But on average, it's a pretty good story in terms of overcoming dining rooms. On the advertising piece, obviously, our advertising algorithms have been changed in this environment. And we're looking at different ways of promoting our brands. The promotions that we're doing with products have changed. You've heard announcements about us skinnying down our menu. We're advertising more core products, advertising more through digital channels. But for the most part, we're committed to continuing to spend the advertising spend that we – each of our brands has. It varies by brand in terms of what the percentage of sales they spend are, but we're committed to that for the balance of the year.

Operator:

At this time, I'm not showing any additional questions.

David Gibbs:

Yeah. Look, thanks, everybody, for spending time with us this morning. As you can tell from the comments, we're incredibly proud of the progress that we've made during the quarter. We were joking that April feels like it was back in 2018. It was so long ago. And what's relevant is the momentum we have coming out of the quarter. I think we've demonstrated that the business is incredibly resilient and nimble, that our teams around the world can move with speed to get new solutions out to meet customers' needs. And they've done that incredibly successfully. And really, what's happened this quarter is accelerated a lot of the strategies that we already had in place, which is a big positive in terms of the business that we do digitally. As we've mentioned, that's up $1 billion year-over-year, actually more than $1 billion. And we – that was part of our plan to grow that business, and we're proud of the progress we've made there. And even things like moving from dine-in assets to delivery assets, that's been accelerated by Q2 2020. So we're coming out of it much stronger, excited about the future. Yum! was, is and will remain a high-growth company for all stakeholders. I think we've demonstrated that this quarter. So thank you.

Operator:

Good day and welcome to the Yum! Brands 2020 First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, today’s event is being recorded. I would now like to turn the conference over to Keith Siegner, Vice President, Investor Relations, M&A and Treasurer. Please go ahead.

David Gibbs:

Thank you, Keith. And good morning, everyone. Before we begin, I would like to take a moment to acknowledge the unprecedented challenges that we are all experiencing and say a heartfelt thank you to our team members and franchisees around the world. It is been amazing to see our entire system band together and take action to confront these challenges with unbelievable speed. And while many of us are working to play our part, the brave healthcare workers on the front lines have the most critical role, and our positive thoughts are with them and everyone affected by COVID-19. Our goal today is to be transparent and give you timely information about the state of our business. I will start with an overall review of first quarter and the current state of the business and use a few examples to illustrate the power of our unrivaled culture and talent and unmatched operating capability. I will also highlight how our brands are adapting the RED framework to be relevant, easy and distinctive in this environment. Then Chris will share more details of our Q1 results and current state. How we are adjusting our business model and supporting franchisees and their healthy liquidity position. For Q1 results, we were encouraged by our momentum early in the quarter driven by the underlying strength of our brand. However, as we signaled in our 8-K on March 24th, the quarter was heavily impacted by COVID-19, which was the primary reason core operating profit declined 6%. Overall Yum! system sales declined 3% as our same-store sales decline of 7% was partially offset by 4% net new unit growth. The impact on our sales in each market is dependent upon the timing, severity and duration of the outbreak as well as each markets reliance on dine-in sale. Importantly, we have seen early signs of recovery in markets that were first impacted by COVID-19 and stabilization in others. As one example, at the time of our 8-K filing, approximately 7000 of our global stores were completely closed, driven largely by government shutdown. As various stores closed and reopened, given changing mandate this figure increased to about 11,000. Since then, stores have been slowly and consistently reopening with approximately 1000 reopens from the trial. Chris will talk more about recent sales trends in a few minutes. Since the onset of this pandemic, the safety and support of our employees, restaurant team members, customers and franchisees has been our top priority. First, we move quickly to reinforce and strengthen our already stringent protocols emphasizing hygiene, cleaning and sanitation. Next, we leverage the best practices of contactless delivery and carry out pioneered by Yum! China, which accelerated our execution of off-premise services. Simultaneously, we move to suspend our dining room operations in many markets. Our brands also continue to expand protective measures for frontline restaurant team members, including protective facial coverings, increased usage of single use disposable gloves, temperature checks, and physical distancing measures where possible. We will continue refining our practices based on consumer feedback and the latest Public Health and Government guide. At our 1,200 Company and restaurants around the world. We are paying scheduled hours to team members who are required to stay at home due to COVID-19. Recognizing the vital role our restaurant general managers continue to play in these 1,200 stores. We have provided $1,000 one time bonuses to our RGM in addition to committing to pay their second quarter bonuses even if their restaurants sales performance would not normally qualify. Also in June, we will pay one-time bonuses to the majority of team members working in our 1,200 Company owned restaurants. Our franchisees are also taking steps to increase supportive restaurant team members during this critical time. Finally, we created a Global Employee Medical Relief Fund to provide financial support for restaurant employees as well as company and franchise owned restaurants were diagnosed with for who are caring for someone diagnosed with COVID-19. I would also like to share some of the steps we are taking to help our franchisees bridge to the other side of this crisis. As 98% franchise system, we are a business comprised of many independent and small businesses and entrepreneurs, and our franchisees are our life blood. Going into this crisis, we reassured our franchisees we will do everything in our power within the constraints we are all facing to help them and their team. We have set up a global franchise health and COVID-19 support team chaired by Chris Turner and our General Counsel, Scott Catlett. To help our franchise partners navigate business continuity in the system with access to all available sources of economic support. Including, but not limited to Yum! provided source. To help our franchise partners, we are providing assistance to those who are in good standing and need more access to capital, including graces periods for certain near-term payments, and deferring certain asset obligations, which Chris will talk more about. Now moving on to our core RED brands. Each brand has listened intently to customer needs and quickly pivoted to adjust in response to the crisis. We have partnered with our entire global franchise system on a shared mission to provide affordable convenient food in a safe low contact environment with drive thru, curbside carryout, contactless delivery and mobile payments. All enabled by our digital and technology capability. In many ways COVID-19 is accelerating trends we were already addressing in our business. Let’s start with KFC division results. This division reported a Q1 system sales declined of 2% as an 8%, same-store sales declined was partially offset by 6% net new unit growth. Given COVID-19 impact details were already provided by the Yum! China on their earnings call. Let’s take a minute to walk through the KFC global business excluding China. Outside of China we had great momentum in the beginning of the quarter with 6% same-store sales growth in January and 4% same-store sales growth in February. In particularly, we want to highlight the UK and the Middle East were having a very strong start to the year. As COVID-19 restrictions, became more prevalent around the world in March. The full quarter ended down 2% for the KFC divisions excluding China. As part of our COVID-19 pivots, contactless services are now available in 90% of KFC markets, and we are doubling down on digital and expanding delivery globally. Digital mix increased through Q1, driven by delivery and click and collect with particular strength in Thailand and Australia. In current trend sustain, KFC globally could end the year with more than a quarter of its sales through digital channels. KFC U.S. is a perfect example of how our off-premise and digital capabilities, along with family friendly affordable meal options are competitive advantages in the current environment. KFC U.S. has made major strides on the staying RED, by offering multiple variations of family style meals that customers can customize. We now have a $30 fill up offer which includes 12 tenders as an add on to the $20 fill up. Truly incredible value with enough food to feed a family for multiple meals in some cases. We have seen a change in how people are accessing buckets of original recipe with digital sales increasing to approximately 10% today. This is up from low-single digits just a month ago. And importantly about 40% of digital sales are going through KFC.com which ones late last year. Moving on to the Pizza division. System sales declined 9% with the same-store sales decline of 11% and flat net new unit growth. Excluding China, Pizza Hut division same-store sales were down 5% in Q1. Globally, Pizza Hut had seen a mass shift in brand messaging, focusing on contactless services, food safety, team members safety and giving back to the community. In partnership with our franchisees, we were able to quickly develop appropriate protocols and training materials to support the rollout of contactless delivery, carry out and curbside pickup now available in over 90 countries. During the first quarter of Pizza Hut U.S., we pivoted towards more targeted and higher margin QSR value constructs and leaned into core products. while offering limited time promotional value on premium products such as our specialty meat lovers pizza and the Big Dipper. We are now starting to see the benefits from the marketing and innovation changes led by Kevin Hoffman, who is serving as Interim Pizza Hut President and the early returns are reasons for increased optimism about the Pizza Hut brand’s ability to succeed in a world where off-premise and contactless are more important than ever. Recent gains in off-premise has helped offset the impact of closing our dining room. And the vast majority of our express units. Express represented 5% of our overall system sales in 2019. At Pizza Hut International, same-store sales declined 4% excluding China. Our heavy delivery and carryout focused markets that have continued to be able to trade without significant restrictions have typically fared well through the crisis thus far. However, many countries across Europe, Latin America and the Middle East have been significantly impacted by COVID-19 related closures and operating restrictions. While, some of the dining declines have been offset by an increase in delivery and carryout demand, such as in the UK, the net impact has been a headwind. Historically, for all of Pizza Hut International off-premise sales have been 50% of sales. And this quarter off-premise sales increased to 70%. To put this into context, our off-premise channel generated a positive 12% same-store sales growth in Q1. In certain Asia markets, Japan, Taiwan and Hong Kong in particular, we saw off-premise sales growth which more than offset dining declines to deliver positive overall same-store sales during the quarter. Turning to Taco Bell, Q1 system sales grew 4% with 1% same-store sales growth and 4% net new unit growth. Importantly, excluding the last two weeks of the quarter, same-store sales growth in the U.S. was trending toward an impressive 6%. The year started with a value offering at a power price point with the $1 Double Stacked Tacos. This was followed by Buffalo Chicken Fries, a very successful program with total sales makes about 9%. Like all of our brands, Taco Bell responded quickly across all fronts to adapt to COVID-19. Taco Bell advertising is highlighting off-premise options and offering free delivery on orders over $12 through Grubhub. In the U.S. delivery and drive-through sales pre-COVID represented about 75% of sales. Now this is nearly 100% of Taco Bell’s sales with digital representing approximately 10%. We have also maintained our below four minute drive-through times, while simultaneously achieving an all time low in customer dissatisfaction. This is remarkable considering how quickly the landscape has changed. Finally, our Taco Bell restaurants have the option to pause offering breakfast and adjust hours of operations as appropriate to best optimize the business model. Also, during the first quarter, we completed our acquisition of the Habit Burger Grill, we knew all along that Russ Bendel and the whole Habit team were very strong operators and we have already seen this in action. In fact, with just 50 drive-through units, the Habit team adapted quickly to the new environment by rolling out many different order modes for carry out such as park-in order, pop-up drive-through and outdoor self order [TI] (Ph). Additionally, Habit digital marketing shifted to focus on value and family bundles accessible through carryout delivery. Combined, the operational and marketing adjustments have fueled our growth in digital ordering, which is now about 40% of sales, up from 10% versus pre-COVID-19 levels. We couldn’t be more excited about what the future holds for that Habit and believe our acquisition of this trend forward brand will prove to be long-term win. Before I pass it over to Chris, I want to offer a few thoughts on Yum’s position as we contemplate the future and move toward a new normal. As I see it, we have four distinct advantages. First, our unrivaled culture and talent. Our brand builders and operators at Yum! are partnering in a way and at a pace we have never seen before, acting urgently on solutions that address the changing needs of our consumers, employees and franchisees. Second, our iconic brands, each of which have endured many challenges for over half a century. And we will recover from this challenge and become even more relevant easy and distinct as a result. Our brands consistently stand for valuing convenience and normalcy, all of which are highly sought out in these uncertain times and beyond. Third, our business model. Our diversification across 290 plus brands country combinations enables us to withstand sustained adverse. Fourth and finally, our strength in the off-premise segment will position us well for recovery and growth. COVID-19 is a stark reminder of just how globally connected we all are. By working together we can limit the spread of COVID-19 and support our frontlines and communities, while doing our part to offer convenient affordable food in a safe environment. With that, I will hand it over to our CFO, Chris Turner.

Operator:

Thank you. We will now begin the question and answer session. [Operator Instructions] Today’s first question comes from David Palmer at Evercore ISI. Please go ahead.

David Gibbs:

Thanks, David. As far as the comments about bottoming, I think we called out that the number of units that were closed at any one point looks like it bottomed at 11,000. And then we have opened back at least 1000 of those, if not a few more. And we are opening more every day. So we think from a unit count standpoint that we are past the trough on that and backed it into the business of reopening. In fact, there is just an announcement that just came out, that KFC UK is going to have up to about 100 of their stores reopened by next week. And they are having success reopening stores primarily through offering delivery from the reopened stores. As far as the sales trends, we are really not going to comment in great detail beyond the comments that we made. That trends have improved significantly, as we have moved through April. That is owing to a number of factors. Certain markets have really figured out how to operate in this environment. Just to give you another example, the Pizza Hut Japan business looks like it is going to be up well over 50% in the month of April. So that is a business that is figured out how to market with value and in low contact options in this environment. Certainly KFC, Australia is doing well. KFC UK, as I mentioned is reopening stores. In the U.S., the stimulus impact on consumers is obviously helping our business and helping build momentum there as well. But I think you heard last night from Yum! China that what they have learned as they have gone through the recovery isn’t that it has been a little bit uneven makes it very difficult to forecast, where bottoms are and exact trends, but certainly look forward to sharing more details on sales, when we get to the Q2 results. I will let Chris talk a little bit more about the franchise health question that you asked in some of those issues.

Keith Siegner:

Thanks. Operator, next question.

Sara Senatore:

Just a clarification and then a question. On the franchisee support, I was wondering and I apologize if I missed this. If you could just talk about the franchisee expense. And I think that was the one line item that was a bit higher than we had expected versus very tight control on some of the other operating service lines. So just a little bit more color on that and the extent to which it reflected the support that you have provided. And then after the peak out you said you are starting to see the benefits of the new marketing approach. Could you just talk about maybe what that looks like? How you are measuring it? Is it customer satisfaction scores or something more tangible? I recognize that in this environment, there is a lot of puts and takes, but just wanted to get a little more color on that. Thank you.

David Gibbs:

And Sara as far as your question on Pizza Hut, we are very excited about the impact it that Kevin Hochman is having on that business, and his new team, he has brought some new people in with him. you have probably seen that we have repositioned the brand’s tagline, to from Our Hut to Yours, that was done before the impact on our business from COVID-19, but really reinforces our credentials as a delivery player. There has been all sorts of work on the operation side in terms of our delivery capabilities. You have seen us rollout contactless carryout in addition to contactless delivery. As a reminder, both of those things were invented by our Pizza Hut China business. And Joey Wat and her great team is being very innovative on reacting to the challenges of this environment. And now they have rolled across our business all around the world. And in fact have also rolled across the industry as it is a great idea to meet the needs of consumers at this time. So this focus on contactless, the repositioning of the brand and focusing on the delivery and carryout component. Actually led to - recently we set a digital sales record in the Pizza Hut U.S. business doing more sales on typical Friday than we did on either of the last two Super Bowls which held our previous record. So it gives you a sense that the brand is going through some rapid changes, things that have been on our roadmap. And what I would like to say is, this three month period we are in right now is basically going to have three years worth of changes to our businesses. And it is accelerating the plan that we had for Pizza Hut and getting us to be truly this digital delivery carryout business. Another major benefit to the Pizza brand, which Kevin and the team are leveraging, it is just the trust that consumers have with the brand given its long operating history and being part of the fabric of the community, Pizza Hut is a trusted restaurant brand. And in times like this, I think consumers are turning to those kinds of brands.

Operator:

Our next question comes from Dennis Geiger, UBS. Please go ahead.

David Gibbs:

Obviously, we are excited about the unit growth that we delivered in 2019 with over 2,000 net new units and that was obviously up from 2018, which was up from 2017. We have had sequential improvement in unit development and expected that to continue into 2020. This new environment changes a lot of the variables. But we still think long-term that the ability to grow our unit count will be there, it may be slightly different. Obviously, with off-premise being a bigger part of the equation, our assets may be a little bit more designed for off-premise than they are today. And in terms of the variables, Dennis as you think about this, there could be an opportunity from a real estate standpoint, I think Yum! China talked about this last night on their call. There could be an opportunity for locations that might not have previously been available. Brands that are doing well in this environment should have an opportunity to expand their footprint. Of course, the challenges in the short-term, our capital availability to our franchisees. And that is something that we will look for them to get through. But we have obviously withdrawn our guidance. So I’m not going to give you exact numbers about what we think about the future. But there is no reason to think that this brands - that our business in any way, shape or form is not going to be a growth business long-term. And unit development is a big part of that.

Operator:

Our next question comes from David Tarantino with Baird. Please go ahead.

Chris Turner:

Yes. Thanks, David. Good questions. Obviously I think for all companies right now managing liquidity through the crisis is top of the list. We feel really, like we are in a really strong position given the moves that we made that I mentioned earlier around starting last year hitting pause on share purchases. And then making the bond offering right at the beginning of April that short up our cash position. We think that gives us plenty of liquidity and plenty of cushion to work with our franchisees as we move through the next quarter. So you think about these grace periods, it is only a subset of franchisees. We will be making those available to franchisees who need the access to capital. And so if you think about our cash burn over the next few months. The number one factor is what is happening to the overall sales rate. And then second, as we see franchisees take advantage of the grace periods we will see couple of months there where, we will have fewer royalties coming in the door. But then as we collect on the back end of that, that will shore back up. But we have got plenty of cushion we feel with our current cash position. In terms of franchisee health, you know, as we mentioned one of the qualifications for being able to take advantage of those grace periods for the franchisees who need it, is that they are in good standing. And so around the globe, our brand teams have worked closely with the franchisees to manage eligibility into that program. So that is something that we have been managing carefully as we go through this. But as I mentioned earlier, this is just one leg of the stool. There is so many other components starting with the great leadership of our franchisees and what they are doing to drive sales, what they are doing to drive the performance of their own businesses, plus all of the assistance they are getting from their other partners in certain cases. And it is the collection of those that gives us confidence about how our franchisees come out on the backside even stronger.

Operator:

Our next question comes from John Glass with Morgan Stanley. Please go ahead.

David Gibbs:

Thanks John. I guess on your first question on unit development, you are right it is unclear just because of the variables that I mentioned earlier. Certainly when you have 50,000 restaurants around the world, we are naturally closing certain number of them every year. That is why we open a growth number of units and have net no openings. That was what we talked about. So to the extent that there may be some situations that we wanted to get out of with units, this would be an opportunity to take advantage of them, if they are closed now. But we are not anticipating a massive number of permanent closures coming out of this. And as far as the Pizza Hut business goes. In the U.S., as I mentioned, Kevin Hochman and franchisees are working really closely together to take the brand to new heights. And become the modern delivery player in the category. And that involves the asset base, and they are working together on that. So there may be opportunities there. But again, capital and there are other constraints that will play into that. As far as the relief that we are providing for the franchisees. As Chris has described it as a grace period, and the money is coming back to us at the other end of the grace period, there really haven’t been discussions about other items like advertising or anything like that and we think the franchisees are working closely with us and we are getting through this. As far as other options for things that we might do, there may be a couple of specific situations, where we will have to do something beyond different than what we have described. But there is no wholesale other programs without the launch to address any of that.

Operator:

Our next question comes from Andrew Charles with Cowen. Please go ahead.

David Gibbs:

Thanks, Andrew. As far as Taco Bell specifically, I do want to just give a shout out to Mark King and the Taco Bell team who put up a great year in 2019. And then as we mentioned in the script, we are targeting along at 6% same-store sales growth until the impact of COVID-19. I have been really proud of how the Taco Bell team has reacted to this. As you mentioned in many ways, their business has had the most impact because they have a breakfast business which our other businesses don’t and because they were relies on late nights. As some of you can imagine, the breakfast business is impacted when people aren’t on the roads going to work. They are not going through a drive through for breakfast as much. And the late night businesses obviously impact people aren’t out in bars and theaters and things like that. So that Taco Bell had the impact from that. But their core businesses drive through business is perfectly designed for this time. And then they are embracing the delivery and carry out model. And, I think Taco Bell and their creative team is well positioned to get through this. As far as the outside capital, that wasn’t meant to imply anything along the lines of pipe or anything like that. That was more designed to address. If we do have franchisees that are in financial distress, one of the options we have is interested buyers outside the system, in addition to in many cases, buyers in the system as options to take over those businesses and restructure them. So I think people recognize that Yum! given the skew towards off-premise is well positioned to come out of this stronger. And there are a lot of outside people with capital that want to participate in that, which Chris and the team will take into account as we address the few situations that become problematic.

Operator:

Our next question comes from John Ivankoe with JPMorgan. Please go ahead.

David Gibbs:

Yes. Great question, John. As I mentioned earlier, I really do things in the few months that we are in the middle of right now are accelerating a lot of trends in the business that would have taken years to take hold like digital order and pay and delivery and technology and all the stuff that everybody is talking about. So in a lot of those things, we have already been working on. We have talked a lot on these calls about the fact that we beefed up our technology team adding Clay Johnson. And at the brand adding all sorts of talent and all the different projects that we have to become much more technology oriented and leveraging that for our business. Those things lend themselves to cross brand collaboration. One of the great things that is going on right now is myself and all of the brand teams and the Yum! executive team are meeting every other day on this crisis to compare notes and leverage our learnings from around the world. We sit in a very unique position, starting with leveraging the learnings that came out of Asia and Yum! China, but all of the other things that are going on around the world right now. This is a great opportunity for us to work closer together and that is exactly what is happening. So I don’t think that is going to be a structural change. I think it is a mindset change. I have talked a lot about the need for even more collaboration in the new world. That is happening, and I think that will serve as well, when we come out of this on the other side.

Operator:

Okay. Today’s final question will come from Jon Tower with Wells Fargo. Please go ahead.

David Gibbs:

Why don’t I take last two, and then I will turn it over to Chris on the PPP. As far as new store development, the same thing that Chris talked about, we get 2,000 franchisees, some of them have no debt, like Yum! China, some of them have significant debt. So I don’t know that there is one broad brush answer to how we financed new store development. I think some of it is through taking on debt and others are doing cash flow of their business? Clearly the increase in new unit development indicates that the return and almost all the it being done by franchisees indicates that the returns franchisees are getting meet all of their requirements. And we still, we do think that those that can access capital or have capital will take advantage of the opportunity to build a potentially insecure size at potentially better rates right now. As far as, I’m sorry, the third part of the question?

David Gibbs:

What things will sustain? Yes, it is a great question in terms of what the future of the restaurant industry looks like. Obviously, there is these trends that are accelerating right now, as I mentioned, digital order and pay, delivery and off-premise. I think automation has a bigger role to play in the business as people look for less contact in their food. But then I also think that this is creating new opportunities that play to the strengths in Yum!. We have this strength in value and convenience and really customer trust. The foundation of QSR has always been value and convenience, but these may have different definitions as we go forward. So convenience, one of the things I’m excited about is curbside pickup. Curbside pickup in a contactless way, is really a great way for customers can take control of the order process, it has all sorts of advantages over delivery in some ways in terms of cost, accuracy and time. And we are seeing surprisingly well, our delivery businesses increasing our carryout business through the contactless curbside pickup, like we have launched at Pizza Hut is also increasing pretty strongly. So that is a change that I think is here to stay I bought a TV the other day and did it through curbside pickup and it was an easy process. And I know consumers are starting to talk more about that. I think on value you are seeing a big change in terms of family meals, obviously with more people eating at home. I think some of that is going to stay in our brands have been great at pivoting to offering more value in larger party size constructs. And, I think the thing that we probably haven’t talked about enough is, when you have three brands like we have with the history that they have with consumers. There is a level of trust that consumers have. I have seen it in a lot of surveys about what brands they want to use at this time. There really has to be that trust. We have always been about things like going above and beyond in food safety. We have had a long history of operating in the communities that people live in. And I think they trust our brands. And I think that trust in brands is going to continue. I will let Chris talk just a little bit about franchisee accessing PPP. And then I will close out.

David Gibbs:

Great. Thanks, Chris. And thanks, everybody. Just want to reiterate. As you all know, we finished 2019 on a really strong note. And we are off to a good start in 2020, before the impact of COVID-19. The business, on a widespread broad basis, it was in good shape before the end of 2019. But we are incredibly uniquely positioned to get through this and come out stronger. And that is our marching orders. And so all we talk about is how do we identify the consumer trends that we need to react to, be nimble and evolve the business, leveraging the learnings that we have from those 290 brand/country combinations. Our unrivaled culture and talent, particularly in terms of the way we are always been attuned to consumers’ needs and constantly evolving. What we offer to the changing consumer is serving us well in this time of changing consumer needs. Our iconic brands, as I mentioned, with the trust and this combination of value and convenience. The diversified business model with 290 brand/country combinations gives us this ability to leverage learnings from around the world. And then finally the fourth point is off-premise. We are made for contactless. Just one simple stat in the U.S. Taco Bell and KFC 95% of their stores have drive through. These were always competitive advantages but bigger advantages today. So I will just finish by thanking the people that bring our business to life on the front lines every day that have been amazing as we have gone through this, our employees and the restaurants and our franchisees. Our franchisees are building stronger bonds with us than we have ever had working together to get through this together. And our employees are doing an incredible job of serving consumers safe food in a contactless manner, to bring some normalcy to their lives during these challenging times. Thanks, everyone, for your time today.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the Yum! Brands Q4 2019 Earnings Release. [Operator Instructions] Please be advised that today’s conference call is being recorded. [Operator Instructions] I would now like to hand the conference over to Keith Siegner, Vice President, Investor Relations, M&A and Treasurer. Sir, please go ahead.

David Gibbs:

Thank you, Keith, and good morning, everyone. 2019 was a truly historic year for Yum!. First, we successfully completed our three-year transformation and delivered on our bold commitments. Second, we surpassed two milestones that are a testament to Yum!’s incredible scale, as we eclipsed $50 billion in system sales and mark the opening of our 50,000 restaurant. None of this would have been possible without our unrivaled culture and talent and over 2000 franchisees who run 98% of our restaurants globally and employ more than 1.5 million restaurant team members. Because of our journey to become more focused, franchised and efficient, we’re now in a much stronger position to accelerate growth and improve franchise unit economics over the long-term. Before I begin, I want to share a heartfelt thank you to everyone within the Yum! family who made these results possible. I especially want to thank Greg Creed, who led Yum! as our CEO for five years with his signature blend of smart, heart and courage. I also want to thank Tracy Skeans, who was uniquely essential to this massive transformation. In her dual role as Chief Transformation Officer and Chief People Officer, Tracy helped shape Yum! direction all while working to make our culture more collaborative and inclusive and getting us in the best position to expand our capabilities with new talent and strategic investments. As an example on the talent side, in 2019 we elevated experienced Yum! executive to critical global growth role. Tony Lowings to KFC CEO, Artie Starrs to Pizza Hut CEO, Gavin Felder to Chief Strategy Officer and Nikki Lawson to Taco Bell Chief Brand Officer. We also brought in fresh thinking and capabilities from outside Yum!, with Chris Turner as Yum! CFO, Mark King as Taco Bell CEO, Clay Johnson as Chief Digital and Technology Officer and more recently Shannon Hennessy, as KFC Global CFO. In addition to our talent moves, we made bold strategic investments that leverage our scale. For example, our U.S. partnership with Grubhub, Pizza Hut’s acquisition of QuikOrder and our growth Alliance with Telepizza. And as we started 2020, we built on this momentum by announcing our plans to acquire the Habit Burger Grill, a fast casual trend forward concept with tremendous growth potential. I’m proud of what we’ve done during this time of transformation and couldn’t be more excited about where we go from here. Now I’d like to share with you a few thoughts on our future direction. One, it’s clear that how we get results in today’s world matters more to our customers, employees and investors than ever before. So you’ll hear us sharing more about our Recipe for Good that outlines our sustainability commitments on our food, planet and people. As such, the guiding purpose for Yum! Brands will be the unlock potential for both growth and good. We’ll remain committed to the four growth drivers and plan to deepen our execution with new strategies and tactics within each one. Two, to grow, we must deliver a consistently positive customer experience wherever we operate. Only the best brands in QSR will thrive and be relevant for the next-generation of consumers. As CEO, I’m committed to elevating the experience for each of our 40 million customers every day and achieving the kind of unit economics only made possible through exceptional talent, industry-leading operations, innovative technology and modern assets. Three, with more restaurants than any other company, we must leverage our scale and technology to create sustainable competitive advantages and growth for our franchisees. You’ve already seen us take steps in this direction. As previously announced, Clay and Gavin are leading a cross-brand effort that embraces disruptive innovation, harmonized platform, advanced data analytics and emerging technologies to transform the customer and employee experience. We’ll also continue to consider acquisitions and strategic partnerships that allow us to unlock value and expand our capability. Four, because our unrivaled culture and talent is a huge competitive advantage, we’re going to continue investing in developing the best leaders and restaurant general managers around the world. We will dial up our effort on diversity and inclusion with a focus on gender parity and underrepresented minorities. In summary, our brands will focus on unlocking our potential with better experiences for our customer and employees, which will ultimately lead to better franchise unit economics and better growth. I’ll now share our overall view of our results for Yum! and a RED brand update. Then Chris will share the details of our fourth quarter and 2019 results, 2020 guidance as well as an update on Bold Restaurant Development and Unmatched Franchise Operating Capability. Let’s talk about 2019 results. Overall, Yum! delivered a strong year with system sales growth of 8%, with 3% same-store sales growth and 4% net new unit growth. Starting with same store sales growth, Taco Bell and KFC were standouts this year with 5% and 4% respectively. For Bold Restaurant Development, 2019 was a record breaking year and I’d like to recognize the efforts of all involved and put it into context. As I previously mentioned, our global system surpassed 50,000 restaurants in 2019. We accomplish this by opening a record 2040 net new units, which represents a 70% increase versus 2016 when we began our transformation. We opened on average nine gross restaurants per day in 2019 and now have an unmatched 287 brand country combinations. I believe our enhanced focused on Bold Restaurant Development resulting from our transformation enabled us to accelerate unit growth and achieve this milestone. Now for our three R.E.D. brands. KFC division finished the year strong. In the fourth quarter, they delivered system sales growth of 8% with 3% same-store sales growth and 7% net new unit growth. For the year system sales grew 9% with 4% same-store sales growth and 7% net new unit growth. KFC International’s results are truly remarkable with strong performances across the board. India had another exceptional quarter with 12% same-store sales growth ending the year with 10% same-store sales growth. Their momentum is attributable to always on marketing around value, innovation and expanding their digital channel. Our Middle East business unit was another top performer in Q4 with 11% same-store sales growth. In the U.S. same-store sales growth grew 1% in Q4, KFC U.S. continues to partner with Grubhub to add locations for delivery and click-and-collect. We now have over 2,800 locations offering delivery and 3,800 restaurants available for click-and-collect. In conjunction with the launch of KFC.com in October, we’re excited about the operational ease this provides to our team members and customers. Moving onto the Pizza Hut division. Fourth quarter system sales growth was flat excluding the benefit of Telepizza with a same-store sales decline of 2% and 1% net new unit growth. For the year system sales grew 2%, excluding the benefit of Telepizza with flat same-store sales and 1% net new unit growth. Pizza Hut U.S., which represents 8% of Yum!’s operating profit excluding corporate and unallocated items reported system sales and same-store sales declines of 4% with a 2% net new unit decline in the fourth quarter. Pizza Hut U.S. continues to be a business in transition. And for the last three years, we’ve made improvements in food quality, speed of service, our loyalty program and upgrading our technology for online ordering and delivery. However, significant opportunity remains in three years. First, more consistent execution in our customer experience across delivery and carry out. Second, ensuring we have value promotions that truly resonate with consumers and that are consistent with the long-term profitable unit economic model. Third, in remodeling and relocating asset base. We are urgently taking steps to change the trend and are working internally with our franchisees to place the brand on firmer footing to grow. To start, we’ve injected new leadership and talent. We’ve added KFC U.S. President, Kevin Hochman to the Pizza Hut U.S. team as Interim President. We’ve also leveraged Yum!’s deep global talent pool to add a new Chief Brand Officer and Chief Marketing Officer. Kevin’s turnaround experience in both CPG and KFC U.S. and he’s proven ability to improve distinctiveness of brands and accelerate innovation, make him ideally suited for this opportunity. Kevin and team are working closely in partnership with our U.S. franchisees, many of whom have the capital capability and commitment to continue driving this turnaround. To be clear, as we work with our franchisees through the turnaround, we have a few guiding principles. First, we are a growth company and expect that all of our brands can and should grow. Second, we remain committed to an asset light model and disciplined spending. Third, we know the formula for success. In markets where we deliver a great customer experience with the best tasting pizza, unbeatable value, distinctive food innovation, a best-in-class digital experience and modern assets, we grow sales consistently. At Pizza Hut International system sales grew 13%, including a 9 point benefit from Telepizza with flat same-store sales growth and 4% net new unit growth in the quarter. The same-store sales gap between the dine-in channel and off-premise sales was approximately 3% this quarter, meaning our off-premise performance remained healthy at a positive 2% same-store sales growth. Europe was the main driver of the quarter’s performance, delivering 3% aggregate same-store sales growth led by strength in the UK delivery business. During the year, the UK, Brazil, Germany, Australia and Spain were the primary contributors to positive same-store sales growth and showed significant improvement in value, the introduction of aggregators and product innovation. Turning to Taco Bell. 2019 marked our eighth consecutive year of positive same-store sales growth, a testament to the power of the brand and excellent customer experience is delivered by our world-class franchisee. Fourth quarter system sales grew 7% with 4% same-store sales growth and 4% net new unit growth. Taco Bell is the great example of what it means to be a R.E.D. brand. The all new Toasted Cheddar Chalupa was introduced in the fourth quarter delivering the innovation that Taco Bell is known for and generating solid sales mix of 10%. We also brought back the very successful $5 nachos box and ended the year with the perennial fan favorites, the Xbox gaming promo box and Rolled Chicken Tacos. 2019 marked the completion of the nationwide kiosk rollout to nearly 6,500 restaurants. Kiosks deliver a modern and easy interface that allows our customers to explore the menu and customize their favorite items. We continue to see meaningful check lift and growing utilization from Kiosk to Grubhub delivery in over 5,100 restaurants to e-commerce nationwide. Taco Bell continues to leverage technology to become easier and more relevant that ultimately drive sale. Internationally, we continue to have strong sales momentum for the year with highlights including India, Canada, Japan, and Europe. We made strides in all in our All Access initiatives this quarter including piloting loyalty in the UK, adding kiosk in four markets including the UK, Spain, Australia, New Zealand. Before I turn it over to Chris, I did want to note that our thoughts are with everyone affected by the coronavirus situation. We’re obviously following this closely and I’ve been in regular contact with Joey Wat, the CEO of Yum China. I know she and her entire team are doing everything they can to work with local health officials and the government to help ensure that they protect their employees as well as their customers. The Yum Foundation is matching their relief efforts with donations that will provide support, medical supplies and masks to the affected areas in China and assist frontline healthcare workers involved in fighting the epidemic in Wuhan. While Yum! business model is highly diversified such that the impact on our financial performance won’t be as significant as what many companies will experience. This will certainly be a headwind for 2020. At the end of the day, this is a business built on people and the health and safety of those people will always be our top priority. With that, I’ll hand it over to our CFO, Chris Turner.

Operator:

[Operator Instructions] Your first question will come from the line of David Tarantino with Baird. Go ahead.

Chris Turner:

So thanks for the questions, David. Obviously, on Pizza Hut U.S., as we mentioned, we are focused on driving the turnaround in that business. As David mentioned, we’re excited about the new leadership that we have in place there and their focus on the fundamental improvements to business on both the way that we translate the brand to consumers and on the asset base. But obviously, there’s a lot of work to be done there. You asked specifically about our largest franchisee. We typically do not go into detail on specific franchisee situations. But as we’ve discussed before on the asset side of the equation of Pizza Hut U.S., we are – the majority of our franchisees are really good partners, they are well capitalized, committed and capable and continue to drive the business in the right direction. We do have a handful of situations where we are working with the franchisees to get them into a better place. Obviously, each of those processes take time and do create some choppiness as a result. As an example, we do have one market in the U.S. where we had a franchisee whose assets simply weren’t up to our standard. We’ve worked with them to exit them from the system, and we’re well down a path to getting a new franchise operator into place. And so hopefully, that gives you a general feel for the situation and why there may be some choppiness as we work toward a better asset base.

Keith Siegner:

Next question, please.

John Glass:

Thanks very much. I did want to just ask a follow-up on Pizza Hut if I could. What was the bad debt expense in the fourth quarter? And how do you – what have you baked into your model? Or how should we think about what that debt may represent as a pressure on earnings in 2020? And can you also talk about Kevin’s early moves at Pizza Hut? What has he done? I understand maybe there’s some change in pricing or franchisees’ ability to change pricing. What are the things that early on he’s really focused on specifically – I know driving sales generally, but specifically to help the brand?

David Gibbs:

Yes. And then as far as Kevin landing in Pizza Hut, obviously, we’re all excited about having somebody with his talents working on the Pizza Hut brand in the U.S. Kevin, as you know, as the CMO and then the President of KFC U.S. really architected the turnaround of that brand and going back to the things that we know matter in our industry

Operator:

Your next question is from the line of Dennis Geiger with UBS. Please go ahead.