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{
"speaker": "Operator",
"content": "Welcome, everyone, to the Yum! Brands 2024 Fourth Quarter Earnings Call. My name is Lauren, and I will be coordinating your call today. There will be an 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."
},
{
"speaker": "Matt Morris",
"content": "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. Please note that this call includes forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements are made only as of the date of this call and should be considered in conjunction with the cautionary statements in our earnings release and the risk factors discussed in our SEC. Please refer to today’s release and filings with the SEC to find disclosures, definitions, and reconciliations of non-GAAP financial measures. Please note that during today's call, system sales and operating profit will exclude the impact of foreign currency. Our fourth quarter results included an extra week for business units report on a period calendar basis, however, all figures stated on this call will exclude the extra week. For more information on our reporting calendar for each market, please visit the financial reports section of the IR website. Finally, our in-person Taco Bell Consumer Day has been rescheduled for Tuesday, March 4, in New York City Taco Bell Consumer Day will take place in the morning and will be preceded by Taco Bell's iconic Live Moss Live event. Due to limited capacity, attendance for both events will be by invitation only. Direct requests can be made by contacting the investor relations team. Now I'd like to turn the call over to David."
},
{
"speaker": "David Gibbs",
"content": "Thank you, Matt, and good morning, everyone. I'm incredibly proud of what Yum! brands accomplished this past year. Despite industry-wide challenges, we continue to deliver strong results, underscoring the resilience of our business model, the power of our iconic brands, and the strength of our world-class franchise partners. Our momentum is clear. We achieved remarkable milestones, generating over 50% of our system sales through digital channels, surpassing 60,000 total units globally, with more than 30,000 at KFC alone, and generating more than $1 billion in core operating profit from the Taco Bell Division for the first time ever. Taco Bell US delivered an incredibly strong year and one that significantly outperformed the industry, showing clearly that Taco Bell is a category of one brand. Our financial results reflect the strength of our business with full year core operating profit growth of 8%, reinforcing the power of our growth strategy and the durability of our business. One of the biggest drivers of our success, and a major unlock for our future, is our proprietary technology platform. In 2024, we accelerated our technology transformation by integrating our digital and technology teams into a unified global team. Additionally, we are thrilled today to introduce Byte by Yum!, our comprehensive collection of proprietary software-as-a-service products that enables our restaurant to deliver faster, more seamless experiences for consumers, while streamlining operations and empowering teams. Integrating our best-in-class, yet previously disparate solutions into a comprehensive, easy-to-deploy solution will help accelerate platform adoption. KFC, Pizza Hut, and Taco Bell, US, all currently operate on our Byte digital ordering platform, and 25,000 Yum! restaurants across the world are using at least one Byte by Yum! product. As we continue to raise the bar on digital convenience and engagement, we are seeing clear results. Our digital sales grew approximately 15% in 2024, and we're just getting started. With the strength of our brands, the power of our technology, and the dedication of our franchisees and teams, we are well-positioned for another year of strong growth ahead. I'll now discuss the strategic drivers that underline our commitment to being the most loved, deeply connected, and always trusted brands for consumers around the world. Afterwards, Chris will provide a deep dive on our fourth quarter results, balance sheet position, and capital strategy, followed by our outlook for 2025. Starting with our loved pillar and our brands that champion consumer experiences, we're pleased to report that our twin growth engines, Taco Bell US and KFC International, delivered 7% system sales growth and 14% core operating profit growth in the fourth quarter. These two businesses, which represent approximately 80% of our divisional operating profit, continue to be powerful drivers of our long-term success. At KFC, which accounts for 49% of our divisional operating profit, units grew 7% driving system sales growth of 3% for the full year, despite a 2% decline in same-store sales. In the fourth quarter, same-store sales were flat year-over-year, with international same-store sales improving to plus 1% and sequential momentum building throughout the quarter. We're especially encouraged by strong recoveries in the Middle East, where same-store sales experienced significant growth and robust performance in Africa, Latin America, and Canada, all of which saw mid- to high-single-digit same-store sales growth. In Africa, comps rose 9%, driven primarily by increased traffic as the team successfully executed a multi-pronged marketing approach, emphasizing boneless and core abundant value offerings while also expanding beverage sales. Latin America's strategy, leaning into everyday value and disruptive promotions, broadens its consumer reach and increased frequency, driving a 6% year-over-year same-store sales increase in Q4. We also saw notable quarter-over-quarter momentum in several key markets, including a five-point improvement across our Asia business, excluding China. Looking ahead to 2025, we remain focused on deepening market penetration by expanding relevant product offerings, including tenders, nuggets, twisters, and sandwiches, while enhancing our value perception. This will involve refining pricing strategies and identifying key category pricing thresholds to ensure we remain at the top of the consumer's consideration. Turning to Taco Bell, which accounts for 37% of our divisional operating profit, the brand continued its strong momentum in 2024, with full year system sales up 6% fueled by exceptional same-store sales growth. Taco Bell not only gained dollar share of total industry spend, but also increased consumer frequency across all income segments, reinforcing its broad consumer appeal. This momentum carried into the fourth quarter, with same-store sales rising 5% year-over-year, outpacing the U.S. industry by five percentage points, driven by the successful execution of Taco Bell's magic formula. The Decades platform, which brought back five of the brand's most in-demand nostalgic menu items, generated strong product innovation, brand excitement, and exclusive merchandise for loyalty members. The team also underscored value leadership with the $7 Luxe Box, one of the most compelling value offerings in the industry. At Taco Bell International, same-store sales grew 3% in Q4, marking the strongest quarter of the year. Several key markets, including the U.K., Spain, and India, saw notable sales lifts after successfully refocusing on brand buzz and disruptive value promotions to drive transactions. Taco Bell's consistent market outperformance, innovative product pipeline, and strategic value positioning set the stage for continued strong growth in 2025. Turning to Pizza Hut, which represents 13% of our divisional operating profit, full year system sales declined 1%, including 2% net new unit growth. In the fourth quarter, same-store sales growth improved 300 basis points sequentially. We saw standout performance in India from successfully driving brand buzz and consumer engagement with innovative limited-time offerings like the Momo Mia Pizza, while also leveraging aggressive value deals to boost frequency in trial. In the US, sales remained under pressure due to more value competition across both the QSR industry and the pizza category. We've seen that everyday value offerings, such as the $7 deal lovers, effectively drive repeat visits from existing consumers. However, to attract lighter-lapse consumers, we must lean further into disruptive and distinctive value promotions. Looking ahead to 2025, our focus will be on striking the right balance between everyday value and disruptive campaigns to engage a broader consumer base. Additionally, we are committed to enhancing the digital experience with improvements to our app platform that will elevate engagement and bring value to the forefront of the consumer journey with Pizza Hut. With the right mix of innovation, value, and digital improvements, we are confident in our ability to strengthen Pizza Hut's relative brand positioning and reinvigorate top-line momentum. At Habit Burger & Grill Division, full year system sales grew 1% driven by unit growth. Encouragingly, same-store sales trends improved in the fourth quarter, fueled by a successful marketing campaign highlighting Habit's recognition as the number-one burger in America by USA Today Reader's Choice. The team will continue to leverage this momentum, emphasizing its suite of award-winning menu items, including the Double Char burger and number-one ranked side, Tempura Green Beans. Beyond top-line growth, we are pleased to see operational efficiencies, translating it to improved profitability. The ongoing labor productivity initiatives launched in 2024 have driven notable improvements in labor throughput, allowing us to reduce restaurant labor expense as a percentage of sales by 150 basis points, despite higher labor rates in California. As a result, restaurant-level margins reached 10% in 2024, 150 basis points higher year-over-year. This progress underscores our commitment to enhancing operational efficiency, strengthening brand equity, and positioning Habit Burger for sustained growth in the year ahead. As we embrace a bolder, more creative approach to innovation, we are taking decisive steps to elevate the consumer experience and meet the evolving preferences of the next-generation consumer. At KFC in December, we opened Saucy by KFC, a flavor-forward test-concept restaurant in Orlando designed for the next generation of boneless chicken lovers. The menu features tenders and sandwiches paired with 11 irresistible sauces complemented by a diverse 11 beverage lineup, including teas, freezes, and refreshers. Early engagement has been promising, reinforcing our belief in Saucy's potential to drive sales and enhance brand relevance. At Taco Bell, we are testing Live Más Cafe, an in-store beverage-focused cafe featuring specialty drinks like chillers, Agua Refrescas, coffees, and more. Consumer response has been strong, with the cafe concept driving meaningful incremental sales. These innovations reflect our commitment to staying ahead of consumer trends, enhancing brand differentiation, and creating new avenues for growth. While these are only one-unit pilots today, we plan to expand both test concepts this year to better understand their long-term growth potential and role in our portfolio. Moving to our connected pillar, we're advancing our ability to serve every consumer everywhere at any time. The strong momentum in digital sales in 2024 is a testament to targeted brand initiatives, loyalty conversion strategies, and continued deployment of our proprietary tech platform. Yum! Digital Sales grew approximately 15% to over $30 billion, underscoring the impact of our digital-first approach. At KFC, excluding China, digital sales surged more than 20%, driven by expanded kiosk adoption. With more than 50% of stores outside China equipped with kiosks at yearend 2024, our teams are focused on reaching 70% penetration by 2026. As digital engagement grows, so does our loyalty opportunity. At KFC, we are scaling our global loyalty program, now live in 14 markets, and early data is promising. Loyalty members show a 12% increase in visit frequency after joining. Loyalty remains a high potential growth area, and in 2025, we will sharpen our focus on optimizing program effectiveness. This includes expanding the adoption of loyalty technology across our portfolio, ensuring we continue to deepen consumer engagement and drive repeat visits through personalized, data-driven experiences. At Yum! we take great pride in our unrivaled culture and talent, including our deep bench of amazing leaders. I'd like to start by congratulating Scott Mezvinsky who will assume the role of KFC division CEO on March 1st. Scott started 20 years ago as an analyst at KFC US and has had multiple positions at both KFC and Yum! including key market leadership roles with KFC around the globe and is currently the President of Taco Bell. Scott's innovative approach and strategic vision have significantly contributed to the success of Taco Bell and I have full confidence that his leadership will drive KFC to new heights. I would also like to recognize and thank Sabir Sami for his years of service and the tremendous impact he made at KFC. Sabir exemplifies what it means to lead with heart, smart, and courage and how these qualities can drive performance. Under his leadership, KFC experienced remarkable growth. As part of our commitment to fostering trust with consumers, communities, and partners, we continue to look for new ways to make our packaging reusable, recyclable, or compostable. KFC US, Taco Bell, and Habit recently participated in the Petaluma reusable cup pilot, which was a strategic opportunity for Yum! to better understand the feasibility of reusables. In addition, Pizza Hut completed the first two of three phases of its initiative to increase pizza box recycling. This project aims to educate consumers about recycling pizza boxes and encourage positive changes in their behavior. Although the pilot is currently limited to one market, we hope that proactive communication about recycling will inspire positive consumer action. Before handing it over to Chris, I want to emphasize that delivering 8% core operating profit growth in a challenging year for the QSR industry while navigating discrete sales headwinds in select global markets is a testament to the resilience of our business model, the power of our brands, and the world-class talent we have leading our businesses around the globe. Looking ahead to 2025 and beyond, we are more confident than ever in our ability to create long-term value leveraging these core competencies. We are taking bold, decisive actions to evolve our organization, positioning ourselves to capitalize on next generation growth opportunities. At the same time, our investments in 2024 involving technology innovation and operational effectiveness will make us more agile and resilient to ensure we emerge even stronger in the next phase of our journey. Everything we do at Yum! is anchored in our mission to grow iconic restaurant brands loved by consumers, connected through teamwork, technology, and our global scale, and trusted everywhere we operate. We are privileged to steward a portfolio of world-class, globally recognized brands backed by a high margin, recurring free cash flow business model operated by best-in-class franchisees that fuels long-term growth and delivers compounding shareholder value. With that, Chris, over to you."
},
{
"speaker": "Chris Turner",
"content": "Thank you, David, and good morning, everyone. Today, I'll discuss our 2024 financial results, our balance sheet and capital strategy, and our outlook for the upcoming year. Starting with the fourth quarter, system-wide sales grew 5%, driven by 5% net new unit growth and 1% same-store sales growth. Our topline trends strengthened in the fourth quarter, fueled by our twin growth engines as well as improvements in Taco Bell International and Pizza Hut International. Taco Bell's very impressive performance in the U.S. outpaced the market significantly. At KFC International, a sharper focus on digital engagement, everyday value platforms, and disruptive value offers led to a two-point sequential acceleration in same-store sales growth in markets outside of the Middle East, Indonesia, and Malaysia. In the Middle East, KFC saw a strong recovery in transactions, with traffic showing strong growth and same-store sales increasing by a notable percentage. By December, transactions had largely rebounded to pre-conflict levels. In China, KFC continued to expand its market share, with these gains further accelerating in the fourth quarter. We remain highly confident in our long-term potential in China, supported by our strong partnership with Yum! China, the largest and most capable restaurant operator in the world. Turning to our cost-line items, ex-special G&A expenses were $319 million, reflecting a 7% year-over-year decline. Reported G&A included a $27 million special expense related to our resource optimization project and costs for our German acquisition and Turkey termination. Restaurant-level margins improved by 20 basis points year-over-year to 17.6%, reflecting strong gains at both Habit and Taco Bell. As a result, core operating profit grew 12% due to higher restaurant-level margins and lower G&A spend. Ex-special EPS for the fourth quarter was $1.52. Moving to our full year results, we achieved 5% net new unit growth in line with our long-term aspirations. Same-store sales declined 1% for the year, impacted by broader global consumer sentiment, particularly in markets affected by the Middle East conflict. Ex-special G&A was $1.1 billion, down 6% year-over-year. Through our resource optimization program, we aim to drive greater efficiencies, enhance collaboration across the organization, and eliminate duplicative work across brands. As a result, we removed approximately $25 million in G&A expenditures in 2024, translating to $50 million on an annual basis, some of which we flowed to the bottom line, and some we reinvested into organizational capabilities that drive future growth. As we transition to a more streamlined, digital and technology organization with increased productivity, and as we continue to deploy our capabilities across our system, we're bending the curve on the net P&L impact of our digital and technology investments. Shifting to restaurant profitability, total restaurant-level margins stood at 16.8%, with Taco Bell achieving 24.3%, its second highest full year margin rate behind 2020. Habit restaurant-level margins improved to 10%, rising at 150 basis points year-over-year and over 500 basis points relative to 2022. Notably, despite higher labor rates in California, Habit's labor costs as a percentage of company sales decreased 150 basis points year-over-year, thanks to strategic labor model enhancements and process optimization. As a result of these moves and the hard work of our teams, we achieved core operating profit growth of 8%, a strong result given the macroeconomic challenges. This reflects the resilience of our multi-brand global franchise business model. Our effective tax rate ended the year at 23.5% outside of our previously communicated range of 21% to 23% due to higher tax expense on the gain realized when we sold our investment in Devyani in 2024. This profit growth drove a 4% increase in EPS to $5.39, excluding special items and the 53rd week impact, but including a higher year-over-year tax rate impact of $0.19, as well as an additional $0.18 headwind due to the combined impacts of year-over-year Devyani net investment losses and current year foreign currency translation headwinds. Moving on to our robust development engine, we opened over 1,800 new units in Q4 and more than 4,500 for the year, reinforcing the strong investment appeal of our brands and the high confidence of our franchise partners and the long-term growth potential of our brands. KFC led the way, opening a record nearly 2,900 new units this year across 97 countries, with 16 markets opening 25 or more stores. This year, the brand saw its highest ever store openings with record builds in China, South Africa, Japan, the Philippines, Italy, and Chile. At Pizza Hut, the team opened 512 units in Q4 and 1,280 for the year, driven by expansion in China, India, Saudi Arabia, and Canada. In line with our modernization efforts, Pizza Hut introduced a new US restaurant design concept in November, replicating elements of its successful digital forward model from international markets. This format aligns with evolving consumer expectations by featuring an open kitchen, self-access pickup cabinets, and a digital drive-through with a streamlined menu of high demand items. Taco Bell continued its expansion, adding 347 new units, including 234 in the US and 113 internationally. Turning to the Middle East specifically, the resilience of our business in the region is evidenced by the fact that we opened 171 new stores in 2024 across our KFC and Pizza Hut brands, excluding Turkey. Thanks primarily to our largest partner in that region, Americana. On a net new unit basis globally, in total, we delivered 1,301 net new units in the quarter and 2,757 for the year, reflecting the strength of our gross openings, partly offset by an uptick in closures of primarily low volume, low royalty stores tied to underperforming markets. Nothing is more important than maintaining high standards and protecting the reputation of our brands. In this regard, last month, we terminated our franchise agreements in Turkey and reacquired the master franchise rights for Germany, which will result in the removal of 284 KFC and 254 Pizza Hut stores in Turkey from our unit count in Q1. From time to time, we remove franchisees from our system when they cannot meet our standards. In those situations, the closing units are typically well below our system average AUVs. As a result, and as was the case with Turkey, the financial impact is typically not significant to our ongoing financial performance from such terminations. These transitions create long-term opportunities for new growth-minded franchise partners, and we are actively searching for the right 3C franchise partner to reopen the Turkey market and drive future success. As a reminder, we had a similar situation in Saudi Arabia in 2020, and that market is now seeing strong growth. I'll now discuss our connected brand strategy that continues to revolutionize digital and technology across our system, strengthening operations, enhancing consumer experiences and unlocking new insights. Through Byte, we are making significant strides across our easy experiences, easy operations, and easy insights pillars, paving the way for a more connected, data-driven, and efficient future. We continue to focus on delivering frictionless consumer experiences under our easy experiences pillar. In 2024, we made excellent progress deploying our Byte digital ordering platform, formerly the Yum! Commerce platform. Taco Bell, KFC, and Pizza Hut in the US are all now powered by our Byte digital ordering products with Pizza Hut US substantially completing its transition in Q4. We also migrated three Pizza Hut international markets, including the UK, onto the Byte digital ordering platform in 2024. In the UK, the platform facilitated over 50% digital transaction growth on the app channel and drove faster processing times than the previous system. In 2025, we plan to expand our Byte digital ordering platform to five additional markets while introducing AI-driven personalization and our omni-channel loyalty software. The Byte digital ordering platform and its seamless connection with our Byte restaurant technologies make it easier for consumers to place digital orders while reducing complexity for our team members. Within easy operations, we empower franchisees with our best-in-class Byte restaurant management platform to enhance efficiency and optimize operations. In 2024, we more than doubled the number of stores using Byte's restaurant coach mobile app, formerly SuperApp, to over 20,000 KFC and Pizza Hut locations across 120 countries. This mobile app simplifies routine audits and operations and is the scale platform we will use to deliver AI-driven recommendations to our team members. Meanwhile, our Byte kitchen and delivery system, formerly Dragontail, is now live in over 8,000 restaurants across multiple markets with full implementation planned for KFC US and Pizza Hut US in 2025 and continued expansion globally. At Taco Bell US, we continue to launch our Byte back-of-house technology, formerly Trax restaurant management system, and reached over 1,500 restaurants in 2024 with plans to scale it across the entire system in 2025. Lastly, I'll discuss our easy insights pillar. Our AI and data-driven approach is redefining how we engage with consumers. Our rich hub of transactional detail is combined with operations data, guest experience data, and consumer data to power our AI strategies. One area we continue to be excited about is AI-driven marketing to enable hyper-personalized messaging and experiences. Already, our US brands are leveraging AI to execute targeted campaigns with early tests on email promotions resulting in a doubling of consumer engagement compared to traditional approaches. This breakthrough is just the beginning. We expect to scale AI-driven personalization across all brands and digital channels, creating more relevant and engaging consumer interactions. With Byte’s rapidly expanding capabilities, we are building an intelligent, integrated digital platform that strengthens our brands, enhances consumer experiences, and empowers our franchisees. As we scale these innovations, we are confident they will drive long-term growth, deeper consumer connections, and a more efficient operating model across our global system. The future is digital, and we are leading the way. Next, I'll provide an update on our balance sheet and liquidity position. Net capital expenditures for 2024 totaled $208 million, reflecting $49 million in re-franchising proceeds and $257 million in gross capital expenditures. In line with our commitment to deliver shareholder value, today we announced an increase in our quarterly dividend to $0.71 per share. Throughout the year, we repurchased approximately 3.3 million shares for a total of $440 million. Combining dividends and share buybacks, we returned $1.2 billion to shareholders in 2024. Our net leverage ratio ended the year at 4.0x, with our debt balance remaining largely unchanged. Given our continued confidence in Yum!’s future trajectory and that our leverage has drifted lower by a full turn, we plan to deliver materially higher capital returns going forward than in the past two years. Specifically, in subject to market conditions, we expect to stop deleveraging and maintain our net leverage ratio at approximately 4x over the medium term by issuing incremental debt as our business grows. Overall, our capital priorities remain unchanged and focus on maximizing shareholder value through strategic investments in the business, maintaining a strong and flexible balance sheet, offering a competitive dividend, and returning excess cash to shareholders. Looking ahead to 2025, we remain confident in our long-term growth trajectory while acknowledging some near-term headwinds. Our Q1 unit growth will reflect the 538 units exited in Turkey. We will also, in Q1, move forward with expediting closures of a number of Pizza Hut restaurants in a few markets, resulting in an incremental 200 closures. Despite the resulting decline in our unit count during the first quarter relative to the end of 2024, we expect full-year unit growth in 2025 to reach at least 4% or 5% when excluding the one-time Turkey-related closures. As always, our unit growth is more heavily weighted to the fourth quarter. We anticipate same-store sales performance will improve in many markets, supported by stronger value perception scores and an ongoing sales recovery in markets affected by the Middle East conflict, and we anticipate another strong year of sales performance at Taco Bell U.S. We expect G&A to increase by a low single-digit percentage, excluding the headwind from the reset of below target incentive compensation experienced in 2024. Including this one-time headwind and assuming an on-target bonus expense, we expect G&A to increase by a mid-single-digit percentage in 2025. We are pleased to share that this G&A profile, coupled with the previously mentioned unit and sales growth drivers, leads us to plan another very strong year of core operating profit growth, delivering on our long-term algorithm target of 8%. Turning to items impacting net income, excluding the impact of the previously mentioned potential incremental debt issuances, we expect interest expense to fall between $500 million and $520 million. Regarding our expected tax rate, we, like other multinationals, are seeing ongoing increases in foreign income tax rates and are increasing our forecasted range for taxes to 22% to 24%. In summary, we are optimistic about the year ahead, with strong brand momentum across our portfolio as we enter 2025. As Matt mentioned, we are thrilled to host Taco Bell's Consumer Day in New York City on March 4, where we will showcase Taco Bell Live Más Live and unveil the brand's ambitious growth plans. Originally scheduled for an earlier date, we decided to reschedule this event to prioritize the safety and well-being of Los Angeles residents affected by the devastating California wildfires and to avoid distracting from the ongoing recovery and rebuilding efforts in that community. With that, operator, we are ready to take any questions."
},
{
"speaker": "Operator",
"content": "[Operator Instructions] Our first question today comes from Dennis Geiger from UBS,"
},
{
"speaker": "Dennis Geiger",
"content": "Great, thank you. I wanted to ask a bit more about international and sort of the solid results and improvement that you saw through 4Q. If you could touch to some extent on the health of international franchisees, perhaps how that impacts your growth trajectory expected through ‘25, and maybe just any kind of characterization of international conditions, the markets you're in. Are they improving? Is it stabilization? And you're just kind of taking share. Any commentary on that would be helpful. Thanks, guys."
},
{
"speaker": "David Gibbs",
"content": "Yes, hi, Dennis. Thank you for the question. Obviously, international is a complex environment for us in the last year, but the good news is things are improving and we feel a lot of confidence going into 2025. I would break, let's take KFC since it's one of our twin growth engines and their international business, I would break it down into three parts. The first is those markets that had a high impact from the conflict in the Middle East. That would be the Middle East markets plus Malaysia and Indonesia. You can see for the full year, our sales, system sales were down 12% in those markets. But in Q4, we were up 11%. We're regaining momentum, we're getting the lapse that are obviously much more favorable. But that obviously had a fairly significant impact on our full year numbers. The flip side of that is there's a number of markets we're tracking where we believe there was no impact. If you look at all those no impact markets in aggregate, the full year system sales growth was 9%. That is very encouraging that within unimpacted markets, our business is performing very strongly at KFC. Now if you look at the performance in Q4, it actually accelerated. It's up to 10% system sales growth. So those two things sort of offset each other, and then you've got all the markets in the middle. And just a comment or two on the markets in the middle, there are a lot of markets where we are seeing where we saw some impact on a trade area by trade area basis, not market-wide, but just trade areas depending on the communities they serve. Those markets are also recovering. An example of that would be a market like India that in Q4 saw a five point swing in same-store sales growth to the better. So we're seeing the improvements in the trade area by trade area impacted markets we're seeing them in the fully impacted markets from last year and we, as you added all up for last year was 4% system sales growth but as we go into next year obviously that creates easier lapse and momentum in the business. Chris, I know you'll maybe you can talk a little bit to franchisee health."
},
{
"speaker": "Chris Turner",
"content": "Yes, Dennis on Franchisee Health, you step back we obviously aspire to be and we believe we are the best franchisor in the world in the restaurant industry. Top three spots in the entrepreneur franchise ranking last year, Taco Bell many years in a row being the head of the Franchise 500 and the number one indicator of global franchise health is the gross unit trajectory that we have 4,500 units this year even when we lost a little bit of the gross unit upside from the Middle East situation that's the ultimate test. Always a few situations that we're working you saw a couple of those have good resolution, Americana acquiring the Pizza Oman business and so we're continuing to stay close to our franchisees around the globe but feel good about the overall health of the franchise base."
},
{
"speaker": "Operator",
"content": "Our next question comes from Brian Bittner from Oppenheimer."
},
{
"speaker": "Brian Bittner",
"content": "Good morning. Thanks for taking the question. You talked about 2025 being in an on algorithm year for core operating profit growth of at least 8% and you also mentioned or hinted that unit growth may be a bit below the 5% algorithm because of the Turkey closings in 1Q. So just curious how are you modeling the makeup of that small gap? Do you anticipate same-store sales to be a bit above the algorithm maybe as KFC International recovers? It seems like G&A based on your commentary is not going to be a big tailwind like it was in 2024. So just any additional details on the 2025 algo that you are willing to give would be appreciated."
},
{
"speaker": "David Gibbs",
"content": "Yes, as far as the algorithm goes, as you can imagine, you can get to the outcome of the algorithm, 8% core operating profit in a number of different ways as we have varying royalty rates around the world. The Turkey closures, for example, aren't much of a headwind because that entire Turkey business in aggregate was a $200 million sales business and with non-material royalty income. So I think the parts of the business that we feel really good about are going to drive our growth this year. And those are our twin growth engines, the recovery in KFC International, that I talked about just a second ago. And then Taco Bell US, a strong fourth quarter, far out distancing the category, a lot of momentum in the business. I don't want to steal our thunder from the Consumer Day that's coming up in just a couple of weeks, March 4th in New York City. But when you take a look at those two twin growth engines and what they're able to do, I think we feel quite confident in our ability to hit that 8% core operating profit number."
},
{
"speaker": "Operator",
"content": "Our next question comes from David Tarantino from Baird."
},
{
"speaker": "David Tarantino",
"content": "Hi, good morning. My question's on your G&A outlook longer term. Chris, I was hoping maybe you could frame up where you think that could go as a persona of system sales now that you, I think you mentioned bending the arc on some of the impact from the tech investment. So should we expect that to move lower over time or I guess any way to frame that up would be helpful."
},
{
"speaker": "Chris Turner",
"content": "Yes, thanks, David, but we're proud of the results that we've achieved with our resource optimization program, coupled with the progress with Byte by Yum! on bending the curve of the net P&L impact of those digital and technology investments. And you saw the result and how that played out in G&A this year. Of course, that was coupled with our incentive comp because of the Middle East trends being below plan. So as we look to this year, you're going to see, as we said in the comments, low single digit percentage increase, which I think is in the ballpark of a normal increase for a scaled asset light franchise or and then on top of that, we've got about a $35 million year-over-year lap on the reset of that incentive comp. But I think if we go long term, we're going to continue to get leverage on our G&A as we grow the top line. And so to your point, over the long haul, G&A, as a percent of system sales should continue to come down. We of course are going to make investments in things that drive the long-term health of the business. We're doing that in AI right now, organizational capabilities around supply chain. So we're always thinking about long-term health, but yes, in general, we're going to get leverage over the long term."
},
{
"speaker": "Operator",
"content": "Our next question comes from Gregory Frankfurt from Guggenheim."
},
{
"speaker": "Gregory Francfort",
"content": "Hey, thanks for the question. My question's just maybe going back to what you want Scott to do with the KFC US business and how you envision him maybe making his stamp and improvements there. Is this a new product, a new cycle kind of calendar? Is it asset upgrades? Is it kind of a bolder rethink of the box and the format? Just any thoughts on what he can do and what you're envisioning that sort of improvement to look like. Thanks."
},
{
"speaker": "David Gibbs",
"content": "Thanks Gregory. Yes, as far as Scott coming in and taking leadership with the KFC brand globally, there's a lot of excitement. Scott's worked all around the world for KFC, knows the business from the inside out, worked at multiple functions. Fantastic leader, has built a great resume of experiences and success at Taco Bell. And we couldn't be more excited about him assuming leadership of KFC. As far as his fascinating part about all this is he started at KFC US 20 years ago. So he sees the brand in all these countries around the world and grounded in the KFC US business going back as far as 20 years. I think he's got a lot of thoughts about ways to strengthen that business, which will let him describe to you as we get further into this journey. But the big issues are just more modernizing the experience for consumers, leading into digital, which that work has already started. You've seen what we're doing and you saw some of the press around our saucy concept, which certainly the initial results from that, to put it mildly, have been very encouraging. So we're going to expand that test pretty dramatically this year to try to get a better read on how elements of that or how that solution would play for the KFC US long-term business. So there's a number of things working between digital and concepting and menu innovation that I think Scott will be perfectly positioned to help lead and help refine."
},
{
"speaker": "Operator",
"content": "Our next question comes from David Palmer from Evercore ISI."
},
{
"speaker": "David Palmer",
"content": "Thanks and agree on those comments on Scott. Congrats to him on that promotion. Wanted to ask one about the technology stuff and Byte. I think Yum! brand is a little different than that fast food franchise or peers and the level of vertical and internal build-out of tech capabilities. And obviously it might be different in terms of tech fees for the service. So maybe I'm wrong in drawing that distinction between Yum! and the peer group, but it's obviously a different strategy for the company and it's one that's exciting going forward. Could you just talk a bit about the arguments for and against this type of thing for the franchisees versus an outsourced model? And then what Byte can do for you and your profit growth in ‘25 in long-term? Thanks."
},
{
"speaker": "David Gibbs",
"content": "Yes, thanks for the question, David. And it's one of the aspects of the business that we are really excited about. We just issued the press release this morning about Byte. So it's a little bit of a coming out party in terms of how we talk about it. My experience working in this business for 35 years is when you're beholden to third party platforms on technology. It's very difficult and it creates a lot of friction in the business. So we go back 10 years. This strategy was started back then as I came into the CFO role and wanted to make sure that we controlled our destiny with the belief that the largest restaurant company in the world, we should have the best technology in the world for our franchise partners at the lowest possible cost. And that we've been on a mission to bring that to life over the last few years. We've done that through acquisitions of world-class technology. We've done that through some in-house development. And one of the really important aspects of this, which is in the release, but I just want to highlight, is the way that we have now built a tech stack that works together. There are a lot of people that operate restaurants where you might have dozens of different tech vendors that you're trying to coordinate with to get to your restaurant to work every day. Think about the complexities of that and trying to get those different disparate platforms to all work together. It's very difficult. We've experienced that firsthand. By building our own tech stack and making that investment, we're giving our franchisees a much more turnkey solution that gives us more capability in terms of how we can grow sales, make the experience easier for the employees in the restaurant. And that is what's behind putting everything under the Byte umbrella and making sure it all works seamlessly together. We now have all the components to do that. It's been rolled out in parts of the world, as you saw from the numbers. Taco Bell US is the head of the rest of the world in terms of rolling it out, you're seeing the results we're getting there, but the rest of the world is going to catch up. So we're very excited about it. When Chris Turner joined us, he brought in a lot of expertise in this area too, and has been the architect along with Joe Park. And then prior to Joe, Clay Johnson on all of this. So I'll let Chris say a few words as well."
},
{
"speaker": "Chris Turner",
"content": "Yes, David, just building on your point that this is a natural milestone on our journey. Keep in mind that the overall purpose of the journey is to deliver advantage capabilities with advantage economics to our franchisees that will drive faster top line and bottom line growth for both the franchisees and for Yum! That's what's driving all of this. And of course, Byte, as David said, just indicates the underlying spirit and increasingly the reality of the seamless integration between the elements and the ecosystem. Plus it makes it easier for us to communicate that integrated ecosystem. I'll give you a couple of examples of how that speed comes to life. You heard us talk about on the last call and on this call, our AI-driven marketing personalization efforts that we were able to stand up very quickly across all three brands in the US because they all have Byte digital ordering in place. Historically, that would have taken us a lot longer to do. And we would have done it at different places across each of those brands because of all the integration work with third parties that would have been required. And so that's enabling speed on bringing new capabilities to market. That integration between elements of the Byte ecosystem is also one we were able to move so fast with voice AI at Taco Bell as an example. So we will continue to drive the strategy. We still got a long way to go in deploying Byte across markets around the globe, but we started with our largest brand country combinations in the US. So as we continue to get adoption, that helps us to reduce the impact on the P&L of our investments, but it was the right thing for us to do the last few years to invest ahead on behalf of our franchisees to build and acquire this ecosystem. As David mentioned, Taco Bell US is the place where we have the most of the elements in place today. And I think it's undeniable that it is adding to Taco Bell's top line success and the bottom line success for our franchisees."
},
{
"speaker": "Operator",
"content": "Our next question comes from Brian Harbour from Morgan Stanley."
},
{
"speaker": "Brian Harbour",
"content": "Yes, thanks. Good morning, guys. I wanted to ask about that topic, too. Is sort of bringing under one umbrella, are you suggesting that there's a pretty significant acceleration and roll out of that this year? Have you sort of accounted for the net impact of that in the guidance that you provided? And I guess you point to Taco Bell US, which is doing very well. Is there any other kind of like illustration in the other brands that you can point to for this is where these technologies are really driving sales or if you sort of separate out some of the markets, have you seen that visible impact?"
},
{
"speaker": "David Gibbs",
"content": "Yes, so we do think that bringing together under the Byte umbrella, again, reflecting the underlying integration that we're building will help us to accelerate over the long term and how we deploy. It makes the deployment faster and it makes it easier to communicate to our franchise partners, the benefits of the overall ecosystem. So, yes, we will continue to drive deployments. Of course, at the same time, we think that those deployments will turn into acceleration and top line growth and acceleration and improvements in unit economics, which supports the unit development story. KFC International, as an example, has had tremendous growth in digital ordering and part driven by kiosks. Every time we convert to digital sales, we hit higher check size, we get increase in frequency, and we get productivity benefits in the restaurant. We talked about KFC loyalty now in 14 markets. France, as an example, we had loyalty sales increase by 40%. So, elements of the overall strategy are coming to life and helping us to drive improvements in the business around the globe, but there's more to come as we do that. Of course, at the same time, as we flow this into the economics. We will need to continue to make investments in the next generation of capabilities to stay at the leading edge. Operator, we’ve time for one more question."
},
{
"speaker": "Operator",
"content": "Our final question today comes from John Ivankoe from JP Morgan."
},
{
"speaker": "John Ivankoe",
"content": "Hi, thank you. The question is on the unique challenges and opportunities you may have of attracting and retaining technologists, best-in-class leading edge technologists, and Byte by Yum! Obviously, being a restaurant analyst, we haven't quite lived through the gold rush of people searching for AI talent and what have you, but it does certainly appear that that's ongoing in many different companies around the U.S. and around the world. So talk about maybe something special or unique you can do to attract and retain the best, not just kind of today, but as this technology and the demand for talent evolves. Thank you."
},
{
"speaker": "David Gibbs",
"content": "I'm glad you asked that question, John. It's probably something that I was a little bit concerned about myself early on in this journey. But the great news is if you think about Yum! known for being one of the great developers of talent in industry, our culture, the growth that our businesses are experiencing and will be experiencing, this is a very attractive place to work. And we are seeing that we are able to attract great talent. Obviously, Joe Park is already becoming an industry icon and leading our technology work. We're not seeing very high turnover in technology, and I can tell you that team is pumped. This announcement today is the result of a lot of their hard work put by together, and we have people looking to come into Yum! all the time and join the technology team. They've got a really exciting journey and they've got the best case scenario wide open space, lots of funding and backing and all of our 60,000 plus restaurants to roll this technology out to and it is one of our competitive franchises in every part of the business, so we could attract the best talent in the industry and that is true in technology. I want to thank everybody for the time on the call today. As we talked to investors, one of them had a great way to describe Yum! which I’ll just sort of quote. You are a quality compounding investment with diversified global exposure in the more resilient, less discretionary consumer space. And I think that is really well put and what you saw in 2024 is exactly that. We delivered our 8% core operating profit goal despite some massive headwinds and we did that because we’ve talented leaders around the world. We’ve some amazing iconic brands and amazing franchise partners. And that will not change. That is our strength and as we go into 2025, as we mentioned, all of that is adding up to momentum at the end of Q4, moving into 2025. And tremendous confidence in our twin growth engines, the ability of those growth engines coupled with Byte and some of the other things we talked about to drive accelerated growth. I’m looking forward to seeing everybody in New York City on March 4th, so if you haven’t reached out to our IR team and if you want to attend, please do so, we love to see there."
},
{
"speaker": "Operator",
"content": "This concludes today’s conference call. Thank you for joining everyone. You may now disconnect your lines."
}
] |
yum | 2,024 | 3 | [
{
"speaker": "Operator",
"content": "Welcome, everyone, to the Yum! Brands 2024 Third Quarter Earnings Call. My name is Lauren, and I will be coordinating your call today. There will be an opportunity for questions at the end of the presentation. [Operator Instructions] I will now hand you over to Matt Morris, Head of Investor Relations. Please go ahead."
},
{
"speaker": "Matt Morris",
"content": "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. Before we get started, please note that this call includes forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements are made only as of the date of this call and should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings release in the relevant sections of our filings with the SEC to find disclosures, definitions and reconciliations of non-GAAP financial measures and other metrics used on today's call. Please note that during today's call, losses and sales growth and operating profit growth results exclude the impact of foreign currency. As a reminder, several of Yum! Brands business units report on a period calendar basis, including all U.S. and Canada brands, KFC U.K. and KFC Australia. When forecasting 2024, please keep in mind this year will include an extra week in the fourth quarter for those entities. For more information on our reporting calendar for each market, please visit the Financial Reports section of the IR website. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. We would like to make you aware of upcoming investor events. Our in-person Taco Bell Consumer Day will be held Tuesday, January 28, in Downtown Los Angeles. Taco Bell Consumer Day will take place in the morning and will be preceded by Taco Bell's iconic Live Moss Live event. Due to limited capacity, attendance for both events will be by invitation only. However, direct requests can be made by contacting IR at [email protected]. Our fourth quarter earnings will be released on February 5 with a conference call on the same day. Now I'd like to turn the call over to David Gibbs."
},
{
"speaker": "David Gibbs",
"content": "Thank you, Matt, and good morning, everyone. Despite the complex consumer environment around the globe, our team managed to grow profits 3% year-over-year with the quarter bringing to light the real strengths of our twin growth engines, Taco Bell U.S., which meaningfully outperformed the industry on comp sales and KFC International, which meaningfully outperformed on unit growth. Although the U.S. QSR industry experienced negative traffic trends in Q3, Taco Bell U.S. posted an impressive 4% increase in same-store sales and led the industry in Q3 on value perception among all QSR users. Taco Bell delivered another quarter of significant market share gains driven by the execution of the brand's magic formula involving brand buzz, value, category entry points and digital engagement. Taco Bell's competitive advantages in innovation, value leadership at compelling price points and strong consumer connection are clear reasons why the brand remains a category of one when it comes to winning with consumers in any economic environment. Our other twin growth engine, KFC International, delivered 9% year-over-year unit growth, an incredible result that led all major competitors and that reflects the underlying power of the brand and the confidence of our franchise partners in the future of our business. KFC International's development was diverse, spanning 64 countries. Furthermore, gross unit openings year-to-date are up nearly 150 units over last year. Building on this momentum, KFC is enhancing its core capabilities to ensure growth over the long term by establishing 7 centers of excellence focused on restaurant design, customer insights, market planning, food innovation and more. These centers will drive operational and marketing excellence while leveraging the brand's scale, strengthening a competitive moat that has helped KFC grow successfully around the globe in 150 countries, an achievement that few global brands have ever accomplished. It is no secret that the global macroeconomic environment remains complex. In many parts of the world, our brands are delivering outstanding growth and outperforming the competition. We continue to see strong sales growth in KFC regions such as Africa, Latin America and the Caribbean and parts of both Europe and Asia. In South Africa, where our KFC sales are up strongly, our teams have improved our value proposition, limiting recent price increases to 1% in comparison to nearly high single digits in affected local competitors. In some other geographies, our permits did not meet our expectations, and our teams are working with our franchise partners to reestablish strong value offerings, all while safeguarding franchisee profitability. The complex consumer environment that exists in many markets around the globe has contributed to pronounced regional sales variations, which has caused our system sales growth to fall short of our long-term algorithm this year. The most pronounced regional headwinds continue to be in the Middle East, Indonesia and Malaysia, stemming from the impact of the Middle East conflict. In these markets, KFC same-store sales declines have generally ranged between 15% and 45% throughout the year, including Q3. We are fortunate that the vast majority of our restaurants are in the hands of highly scaled and well-capitalized franchisees around the globe, including Americana, our largest partner in the Middle East, who can weather temporary headwinds like this over extended periods. However, in a few isolated cases, the scale and duration of these sales impacts are affecting the financial health of our less scaled or less well-capitalized partners, particularly those whose restaurants have been most heavily impacted by the Middle East conflict. We are working closely with those specific partners to help them navigate the challenges and implement tactical and strategic changes, including pricing studies, introducing new value offerings and adjusting development schedules to improve profitability and position business for healthy growth in the future. As we mentioned on the second quarter earnings call, the same geopolitical pressures have grown to meaningfully, but less severely impact certain markets beyond the Middle East, Malaysia and Indonesia. As an example, we have seen in the U.K., Australia and New Zealand that KFC same-store sales performance in certain individual stores has been significantly impacted. Importantly, these specific pressures have been location specific and not indicative of broader global trends. Specifically, our KFC markets, excluding China that we believe were not materially impacted by the Middle East conflict, reported an encouraging low single-digit increase in same-store sales. As we shift to the U.S., the overall QSR industry is navigating a complex consumer environment. Of course, our scale and digital capabilities are an even bigger advantage right now and our powerhouse Taco Bell business, which represents 75% of our U.S. profit, is thriving. While our Pizza Hut and KFC businesses are more challenged in this environment, we have fantastic leaders in place in these businesses who are working through revised strategies to create a step change in the results. Overall, we achieved 5% unit growth year-over-year, an impressive outcome considering the obstacle faced by our teams. Closures have temporarily increased this year, primarily in markets dealing with impacts from the Middle East conflict and in China. Despite the strength in our gross unit openings in this tough environment, the risk of an increase in closures of lower volume units affected by the Middle East conflict could impact our Q4 net new unit growth and put at risk our ability to deliver our 5% unit growth target. Given the lower volume nature of these units, we would not expect a material financial impact from their closure. While 2024 unit growth will reflect a temporary reset on unit closures, we're encouraged at the pace of our gross unit openings that Chris will discuss in more depth and as we look at our 2025 pipeline, see no change in pace behind our gross opening momentum, giving us confidence in the strong fundamentals of our brands. Now let me highlight our relevant, easy and distinctive brands, or RED for short, in more detail followed by our unrivaled culture and talent and good growth strategy. I'll then turn it to Chris to provide further updates on our third quarter results, including our bold restaurant development, unmatched operating capabilities and balance sheet position and capital strategy. Starting with the KFC division, which represents 50% of our divisional operating profit, system sales grew 1% as significant unit growth was offset by the aforementioned Middle East conflict impact and transaction softness in several regions navigating constrained consumer spending. Such challenges have led competitors to introduce incremental value offers, namely to capture low ticket transactions in markets such as the U.K., France and India. The good news is that despite category headwinds, we are gaining or holding share in several of our largest international markets as well as seeing positive transaction growth in markets like Mexico, Poland and Korea. We're also sustaining high system sales growth in larger regions like Africa and Latin America and the Caribbean, where we benefited from product innovation and more stable consumer environment. Helping KFC to remain agile has been the focus of its robust digital strategy. Digital mix, now over 55%, grew 3 percentage points over the previous quarter on expanding kiosk and click-and-collect channels. In the U.S., limited time offers underperformed expectations due to a more intense competitive environment, particularly within the chicken QSR category. In Q4, the team will focus on strengthening its value proposition and has recently introduced boneless innovation like original recipe chicken tenders. Additionally, the team will capitalize on the success of the KFC Rewards membership growth, which has contributed to digital sales growth over 20% from last year. Moving on to Taco Bell, which contributes 37% of our divisional operating profit. System sales grew 5%, driven by a 4% increase in same-store sales. This quarter, Taco Bell gained momentum with the launch of the Cheesy Street Chalupas, marking the brand's first innovation on the canteen chicken platform. Further momentum came from the reintroduction of the Cheez-It and investing behind the $7 Lux cravings box. The team tapped into cheesy Street Chalupa innovation to drive delivery sales by offering exclusive access to an aggregates premium members, which led to 7 daily sales records for the aggregator during the quarter. Toward the end of the quarter, the team made the strategic move to make breakfast optional for our franchise partners, providing greater flexibility to spend our marketing dollars more effectively on growth drivers such as Cantina Chicken and our cravings value venue. These are platforms where our marketing spend has had significant success building new and very profitable sales layers. We expect the net impact from these changes to be less than a 1-point headwind to same-store sales growth. We intend to reintroduce breakfast in the future with a bolder, more distinctive Taco Bell approach. In another strategic priority involving growth through its loyalty program, Taco Bell drove impressive advancements with 90-day active loyalty users increasing by 50% year-over-year. On the digital front, where Taco Bell U. S. has implemented the majority of Yum!'s digital and technology platforms, digital sales grew an amazing 30% year-over-year. Internationally, Taco Bell focused on executing its 3 core pillars, brand, food and value, leading to positive same-store sales growth for the quarter. Very encouragingly, that momentum has continued into Q4. To strengthen brand relevance, the team is connecting more with local cultures, including most recently in the U.K. with the launch of encore hours, allowing stores to stay open late near music venues to serve fans after shows. We were also pleased to see our first equity store opened in the U.K. in late October with a very encouraging consumer response, giving us confidence in our accelerated investment in the brand internationally. Clearly, Taco Bell International has the potential to be a third growth engine for Yum! for many years to come. At Pizza Hut, which represents 13% of our divisional operating profit, system sales declined 1% as the same-store sales decline of 4% was partially offset by 2% unit growth. The third quarter started strong in the U.S. with momentum from my hot box and a robust marketing plan for the Chicago Tavern Style Pizza, which translated to positive traffic growth for the full quarter and ahead of the QSR industry. However, product news and bounce-back offers were not sufficient to compete against deep value offers in the market. Throughout the quarter, several markets became more intentional in pursuing value, including China, India and countries within the Middle East. As an example, in some of our pressured markets, we shifted towards a lower price point value over abundant value. At the same time, we are making progress in repositioning the brand over the long term, most recently hiring a new Chief Brand Officer, and have plans to improve and expand our consumer relationship management and loyalty platforms next year. Lastly, at Habit Burger Grill, while overall sales remained under pressure during the third quarter, there were encouraging signs of momentum as the quarter progressed. Same-store sales trends improved each period in the quarter as the team leveraged recent accolades, including being recognized as having the #1 grilled chicken sandwich by daily meal and the #1 fast food burger inside by USA TODAY. These accolades were impressive, given many of the other contenders have a broader national presence with larger store footprints. Clever marketing efforts, combined with refinements to have its media mix using Yum!'s proprietary marketing analytics platform, successfully ignited consumer excitement driving visits to the brand to experience the award-winning Double Char and tempura green beans. I'm pleased to see this positive momentum continue into the fourth quarter. Now I'll turn to our good growth strategy, starting with our people pillar. A hallmark of Yum! and a key driver of our performance is the strength of our talent base, including our deep bench of amazing leaders always ready to take on bigger roles. I'd like to start by congratulating Erica Burkhart, who was recently promoted to Chief Legal Officer and Corporate Secretary for Yum!. Erica is a seasoned and respected leader throughout Yum!, who has been with the company for over 20 years. She leads by example and has earned the trust of her peers and teams alike, providing invaluable insight and counsel on key initiatives across Yum! and our brands. I would also like to recognize her predecessor, Scott Catlett, for his years of service and the tremendous impact he made at Yum! and our brands as he starts a new chapter outside of the company. Additionally, as we progress on our journey to becoming the leading global digital restaurant company, I'm pleased to announce Joe Park has been named President of Yum!'s Digital and Restaurant Technology Ecosystem in addition to his overall Chief Digital and Technology Officer role. He's doing a fantastic job bringing our vision to life for a fully collaborative digital and technology team across Yum! and is reinventing how the team works to drive increased consistency and efficiency in tools and processes as well as greater deployment of AI-driven capabilities, leveraging our global data assets and scaling our proprietary technology. Also during the quarter, for the first time in over 2 years, we brought nearly 200 of our most senior leaders from around the world together for our Global Leadership Summit. Our technology leaders at the Summit made up the largest functional group, demonstrating our focus on leaning into our digital leadership and our investments in AI. We showcased the progress we're making on our good growth journey and what we're doing behind the scenes to reinvent how we run the business by better exploiting our scale to drive future growth. Moving on to the planet pillar of our good growth strategy. Just last month, we published our annual global citizenship and sustainability report. This report highlights Yum!'s long-standing dedication and continued progress and investments in our 3 priority pillars of people, food and planet. We are on track to reduce our greenhouse gas emissions by nearly 50% by 2030 and continue to make progress around sustainable packaging building upon our harmonized cross-brand packaging policy. In closing, in a difficult operating environment, we are encouraged by the underlying strength of the fundamentals of our business. Stepping back, our twin growth engines are demonstrating what makes them special through share gains at Taco Bell U.S. and strong franchisee investment in unit expansion in KFC International. Despite the numerous headwinds, we are proud of the resilience of our overall business model and our ability to deliver 6% core operating profit growth year-to-date. Importantly, our teams are making great progress in ushering our brands into the [indiscernible], leveraging Yum! scale and digital and technology capabilities to improve sales and operations, leading to improved franchisee profitability and value creation for our shareholders. With that, Chris, over to you."
},
{
"speaker": "Chris Turner",
"content": "Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our bold restaurant development and unmatched operating capability growth drivers, our balance sheet and capital strategy, and provide an update on our outlook for the remainder of the year. Turning to our third quarter financial results. System sales grew 1%, driven by 5% unit growth. As the third quarter progressed, sales trended below our expectations due to a more challenged U.S. environment, soft trends in China and continued pressures from the Middle East conflict. Ex special G&A was $252 million for the quarter, less than anticipated due to lower performance-based compensation. Reported G&A was $263 million, including $11 million of special expense related to our ongoing resource optimization program. Restaurant-level margins were 15.8%, modestly below levels from last year, partially due to KFC U.K. and Ireland equity restaurants acquired in the second quarter. Core operating profit grew 3%. Third quarter ex special EPS was $1.37. Our ex special tax rate was higher year-over-year at 24%, translating to a $0.09 year-over-year EPS headwind. Now on to development. In the third quarter, we achieved a significant development milestone, surpassing 60,000 restaurants worldwide. Overall, we increased our unit count by 547 units, reflecting 1,029 gross openings and 482 closures. KFC drove Yum!'s unit growth with the team opening 685 gross units led by China, India, Thailand and Japan. Notably, we've seen an acceleration this past year in net new unit expansion in markets like Italy, the Philippines and South Africa. Most of our key KFC markets report paybacks less than 5 years, and as a result, we continue to see a strong appetite by franchisees for unit growth. In Saudi Arabia, for example, we expect our store count this year to grow by nearly 30 restaurants with paybacks still under 3 years despite conflict-related sales pressures. Turning to Pizza Hut. We added 63 units this quarter, driven by 292 gross unit openings offset by 229 closures. New unit openings were led by China, India and the United States. Taco Bell added nearly 50 gross units, led by the U.S., while 14 other countries contributed to growth. Recall, Yum! China went through a portfolio restructuring earlier this year, resulting in 60 closures in the first half of the year. Excluding China, Taco Bell International's unit count increased 7% year-over-year. Last month, we also opened our first store in Bosnia and our first equity store in the U.K. We expect to open several equity Taco Bell U.K. stores by year-end, providing a fantastic test bed to generate insights to guide the business model, including an innovation, pricing, technology and restaurant experience. Moving to our digital and technology initiatives. We continue to make great progress on both of the parallel phases of our journey. Recall, the first phase is focused on acquiring, building and scaling a comprehensive suite of platforms to enable ownership of our data, control of the digital ecosystem speed of innovation and cost advantages. These foundational platforms include aside, our young, cloud-first point-of-sale system, our e-commerce engine, our delivery optimization platform, Dragon Tail, Super App, an integrated restaurant management platform for team members, restaurant general managers and area coaches, and a scalable global data platform that houses over 80% of our transaction data. In the second phase, we are focused on maximizing the value creation potential of our platforms through AI and by leveraging our extensive data assets. We believe we are still only scratching the surface of the full value creation potential of our capabilities with exciting innovations, including One Touch labor scheduling and inventory management, consumer feedback dashboards, quality control monitoring and personalized AI-driven marketing, to name a few. Let me now discuss additional digital and technology accomplishments for Q3 across our easy experiences, easy operations and easy insights pillars. I'll begin with our easy experiences pillar, focused on providing frictionless experiences to our consumers. Taco Bell is currently working on 2 significant digital initiatives in the drive-through, voice AI and loyalty program enhancements. Drive-through voice AI continue to scale across our network with many franchisees eager to test this new innovation. To date, we have processed over 2 million successful orders with the system now in place in over 300 Taco Bell U.S. stores, making Taco Bell the largest QSR voice AI brand in the world. For loyalty, Taco Bell is using its connected ecosystem to allow loyalty consumers to identify themselves at the drive-through and kiosk, enabling personalization of their ordering experience and earning and redeeming of loyalty rewards. This was rolled to 160 stores in Q3, and we're encouraged with early results, which clearly show an increase in sign-ups and in daily loyalty transactions all without an impact to speed of service. As required enablers of these technologies, we have accelerated deployment of digital menu boards to now over 6,000 restaurants. Digital menu boards will be a Taco Bell brand standard in 2025, along with Yum!'s proprietary point-of-sale system side. Our other key initiative under this pillar is the rollout of Yum!'s e-commerce engine. We completed migration of a substantial portion of Pizza Hut's U.S. traffic in the quarter and are on track to complete migration by year-end. We also recently launched the Yum! e-commerce engine in Pizza Hut U.K., our second international Pizza Hut market, and will target 2 new Pizza Hut international markets before year-end. Next, I'll discuss our easy operations pillar, where we continue to deploy our world-class technology to provide our franchisees and team members with the capabilities to operate their stores more effectively and efficiently. This quarter, we started to expand Super App to KFC U.S. now having reached 50 countries and nearly 5,000 KFC and 8,000 Pizza Hut stores with the technology. We are planning to nearly double the KFC penetration by year-end. Recall, Super App is our modular restaurant management platform that offers a suite of products to managers and team members to simplify their jobs and improve operations. This quarter, we also reached significant scale for our AI-powered labor scheduler, now in use in over 5,000 Taco Bell U.S. stores, driving significant improvements in labor planning accuracy and labor efficiency. At Taco Bell, we now have AI-powered forecasts, driving both our labor scaling and inventory management processes. We expect to scale these solutions to our other brands throughout 2025. Lastly, I'll discuss our easy insights pillar. This quarter, we successfully launched personalized AI-driven marketing campaigns that relative to traditional digital marketing campaigns generated significant increases in consumer engagement, leading to increased purchases and a reduction in consumer churn. This innovation has the potential to greatly improve our marketing return on investment and allow us to extract the unique benefits of our proprietary global data hub, and we expect it to be broadly and easily scalable across brands. Next, I'll provide an update on our balance sheet and liquidity position. Net capital expenditures for the quarter were $34 million, reflecting $52 million in gross CapEx and $18 million in refranchising proceeds. We repurchased 2.1 million shares totaling $277 million. Our net leverage ratio ended the quarter at 4.1x. As a reminder, we have no debt maturities until 2026. Our capital priorities remain unchanged: investing in the business, maintaining a resilient balance sheet, offering a competitive dividend and returning excess cash to our shareholders. Before I close, let me touch on the outlook for the balance of 2024. We expect Q4 core operating profit growth to be mid- to high single digits, excluding contributions from the 53rd week, which we expect will add approximately $35 million. Of course, precise forecasting is difficult in this environment. To finish with guidance, we expect Taco Bell fourth quarter company-operated store margins to be in the range of 23% to 24% and lastly, our Q4 net interest expense to be just under $140 million. Taking into consideration the challenging environment, I am incredibly proud of our team's perseverance to open approximately 4,500 gross new restaurants or roughly 1 store every 2 hours, an envy at restaurant industry. Into next year, we'll continue our focus on capturing the global white space opportunity that offers significant runway for our iconic brands. I'm excited by our continued progress in transforming Yum! into a digital multi-brand powerhouse. We look forward to seeing many of you at our upcoming Taco Bell Consumer Day in January, where we'll further unpack many of these exciting digital and technology initiatives. With that, operator, we are ready to take any questions."
},
{
"speaker": "Operator",
"content": "[Operator Instructions] Our first question comes from Gregory Francfort from Guggenheim Securities."
},
{
"speaker": "Gregory Francfort",
"content": "My question is going to be on operating profit growth, but thanks for the thoughts on the fourth quarter. I think that leaves you a little bit below the 8% growth for this year. I guess, as you look out to next year, how confident are you in getting that back up to 8%? And what's the bridge maybe from what the outlook looks like this year to what might be the contributors next year?"
},
{
"speaker": "Chris Turner",
"content": "Yes, Greg. Hey, this year, year-to-date, we’ve got 6% core operating profit growth in a really challenging environment. So when we step back and look at that, we think that demonstrates the strength and resilience of our business model. The main change from the last time we updated you on the last call is that our sales didn’t meet expectations in a few key markets, including China and the Middle East, where we have outsized exposure. And as a result, we tempered our expectations in Q4. Of course, that on a full year basis, if you flow through, [indiscernible] about Q4, we likely will end the year below our operating profit algorithm for 2024. But of course, the main driver of that was this conflict situation. Without that, we would have had a very strong year and been on or above the algorithm. And of course, we delivered that while still investing in things that drive the long-term health of the business. Big investments in digital and AI. We talked about voice AI progressing rapidly, marketing-driven AI, 40 other AI-driven projects that are happening in the business. So that resilient business model and investing in the long-term growth of the business. We’re still working through the plans for 2025. We’ll share an update, as we always do, on the next call. But there’s no major things that are unusual right now as we look at that 2025 plan. But when we think about the long-term trajectory of the business, our dual growth engines continue to perform and our digital capabilities continue to power the business."
},
{
"speaker": "Operator",
"content": "Our next question comes from Brian Bittner from Oppenheimer."
},
{
"speaker": "Brian Bittner",
"content": "Just a confirmation question and then a follow-up on Taco Bell, just on the guidance for the fourth quarter as it relate to mid- to high single-digit core operating profit growth. Are you able to talk about the base case for global same-store sales that does underpin that outlook by any chance? And just on Taco Bell, very strong relative performance, obviously, with your 4% same-store sales. And you mentioned that you were the best ranked by consumers in value within QSR during the quarter and it obviously happens at a time where the industry got way more aggressive. So just curious how you protected or even expanded your value positioning in this environment? And is there any new value ideas in the hopper as we move into 2025, particularly as a few large QSRs are eager to put more permanent value on their menu?"
},
{
"speaker": "David Gibbs",
"content": "Yes. Thanks, Brian. I’m glad you pointed out the Taco Bell’s strength, it’s obviously something we’re incredibly proud of. And you can see that strength is evident in the U.S. with the plus 4. We were also positive in international. And the other thing I’ll share is that, that momentum has continued into Q4. A lot of it is what you said. It has to do with the unique way that Taco Bell can provide value with products that nobody else has. Really, if you think about it, Taco Bell can provide a product that is a value product, that’s an innovative product and that can help our franchisees margins. That’s an incredibly powerful set of tools that we have in our toolbox that our competitors don’t. As we move forward, of course, Taco Bell has always got ways to bring in new value. Right now, you’re seeing us launching the decades menu and then you can get some of those products within the $7 Lux Box, for example, which is a unique way to bring innovation and value to consumers. So I think we’re very confident in Taco Bell’s ability to win in this environment relative to our peers. As far as sales guidance and everything for the quarter, it’s obviously a difficult environment to forecast sales globally. But as I said, the trends that we saw in Q3 are continuing into Q4."
},
{
"speaker": "Operator",
"content": "Our next question comes from Jon Tower from Citi."
},
{
"speaker": "Jon Tower",
"content": "Great. I appreciate all the color you provided in the gross unit openings for the brands across the globe. I was hoping maybe you could drill a little bit more into the net unit number. David, I think you mentioned that there's a potential risk of not hitting the 5% this year. And then maybe specifically drilling into, you do have pockets of weakness across the globe. And I think you had mentioned some of the smaller operators having a hard time keeping the lights on. How should that inform the thinking regarding '25? Is there an opportunity to perhaps consolidate some of those closures into '24, such '25 is a cleaner year? And/or are there opportunities to consolidate some of those stores into larger operators within markets such that your net unit number is not under too much pressure?"
},
{
"speaker": "David Gibbs",
"content": "Yes. I have a couple of things on development, and then I'll let Chris give them a little more detail. If you think about it, 2024 is obviously a very challenged year in terms of the impact to our sales in certain parts of the world and some of the consumer pull back. So for us, we're incredibly proud that this year does showcase how resilient business model is and the capabilities of the vast majority of our franchisees to continue to grow and invest in the business in this challenged environment, like American, our franchisee in the Middle East, you would think that this business would have disrupted -- this situation would have disrupted them more than it has, but they just reported. They're positive operating profit in this environment, continuing to develop. That is a unique strength of Yum! in terms of the capability of our franchisees around the world. And 2024, as difficult as it is, really is allowing us to showcase that and let that part of our business model really shine. Americana has got about 2/3 of the stores of the Middle East, so most of our stores are in very good hands. As far as the risk that we signaled on net new units, just to clarify and give you a little more detail, that was risk to the 5%. Right now, the numbers that we're looking at roll up in the 4.5% to 5.0% range. So we would still round to 5% on algorithm. But closures are obviously a little elevated this year. If you're going to have a little bit of a shortfall, you'd rather have see this strong gross development mostly continuing and then closure of some lower volume stores. If you think about the closure rate, it's probably about another 0.5% of our store base. So this is not some widespread issue to your points about struggling -- other struggling franchisees. It really isn't a widespread issue. It's just a few stores, lower volume that might have closed in the future where those closures were pulled up. I'll let Chris give you a little more color on it."
},
{
"speaker": "Chris Turner",
"content": "Yes, John, let me give you a little more color on the change in net new unit trajectory first through a couple of lenses. First, if we just look at the deceleration in net new unit growth from last year to this year on a geographic perspective, we see that about 40% of the change in trajectory comes from countries and markets in our business that are directly impacted by this conflict situation. There’s another 25% that are markets that have some impact from the conflict, not as much as those core markets, but that gives you about 2/3 of the change in net new unit trajectory that is in some way tied to the conflict situation. So that gives you a little bit of bound on it. And of course, history would say we typically work through these situations over the long term. Another way to look at it, David mentioned a little bit higher closures this year. As we said before, when units closed in our system, they tend to be lower volume units. And we see that again this year. The average unit volume of the units that are closing this year is about 60% of our global average unit volume. And so when you actually look at the system sales contribution of our net new unit growth this year, it’s going to be basically the same as the system sales growth contribution from our higher net new unit rate last year. So the economic implications of this aren’t that big on our business. So that gives you a couple of additional ways to just think about this change in net new unit trajectory. The other thing I'll add, you asked about specific franchisee situations. As David said, our global franchise base is strong. Americana in the Middle East region has – the majority of our stores is navigating this very well. In fact, in the 22 countries in the specific Middle East geography, we only have 2 countries right now where we’re working with franchisees to transition the business into better hands. One of those processes is pretty far along. Another one, we’re working with the franchisee to either address some challenges in the business or to get it into the hands of another owner. There’s some complexity always in the beginning of those situations, we might have some unit closures might have some onetime accounting adjustments that come with it. But our history would say that we typically end up getting the business into 3C franchisee hands, and that sets the business up for long-term growth and health."
},
{
"speaker": "Operator",
"content": "The next question comes from Dennis Geiger from UBS."
},
{
"speaker": "Dennis Geiger",
"content": "Great. Recognizing it's too early to talk about '25 specifically. Wondering if you could just comment high level about how you think about managing profitability as well as the team has in '24 if macro pressures continue? Maybe specifically, can you talk a little bit about G&A growth and how you think about that generally looking ahead and perhaps the ability of the divisions to continue managing cost and profitability?"
},
{
"speaker": "Chris Turner",
"content": "Yes. As I said earlier, we’ll give more of an update on the 2025 plan when we get to the next call. As I mentioned, there’s nothing that’s significantly unusual right now as we’re tumbling that plan. As we think about the puts and takes, our twin growth engines continue to perform in a strong way. We’ve shared that our gross unit outlook for next year is similar to this year. On the G&A front, we’ve made productivity moves this year. We’ll continue to get some benefit from those. Of course, we will have a reset of our incentive comp. So those are a couple of factors that we’ll look at there. But if I think about the long-term trajectory of our business, there’s a lot to be excited about, in particular, with those 2 primary growth engines. Taco Bell continues to outperform in any sort of economic environment in the U.S. KFC International 9% unit growth in Q3 continues to build units outpacing its competitors, and our digital story continues to strengthen. So if you look over the long term, there’s a lot of reasons to be excited and confident in our business model."
},
{
"speaker": "Operator",
"content": "The next question comes from David Palmer from Evercore ISI."
},
{
"speaker": "David Palmer",
"content": "I wanted to maybe double-click on a couple of the digital initiatives. You highlighted the AI-enabled digital marketing that you talked about, Chris, and David mentioned the AI-enabled drive-throughs in the release. On the digital AI marketing, is that hyper personalized push marketing in the app and other? You mentioned it was a nice lift where you're rolling that out. Could you maybe give some more color about what that lift was and where the rollout is across your brands? And on the AI voice drive-thrus in the U.S. I'm wondering if that could be a nice profit driver for Yum! Brands. Any reason that would not scale quickly in 2025 and any offsets to the fees that you'll collect there?"
},
{
"speaker": "Chris Turner",
"content": "Yes. Great. These are 2 initiatives that we’re very excited about. I’ll provide a little more color on the AI-driven marketing. This is something we’re doing in a coordinated way across our 3 large brands in the U.S. We’ve run pilots in each of the brands. I’m not going to share any specific numbers on it. But I can tell you what enables it is our digital ecosystem. And it’s really what we call the AI factory within that ecosystem that leverages our massive data assets that we’ve built, which enable us to know our consumers. If you think about in the Taco Bell environment, it leverages the fact that we have the POS in the store, the digital menu boards and the ability to actually bring these to life at the store and through our loyalty programs and through our connections with customers in the app. So we’ve got many ways to bring it to life, but it essentially allows us to do more personalized tailoring of offers and to learn and refine much more rapidly than we could before. So we’re excited about the potential of this. We’ll continue to bring it to life across the brands and across markets as we progress. On the voice AI side, really, we’re driven by how do we enhance the consumer and customer experience in our restaurants and how do we enhance the team member experience. And so far, the results in Taco Bell with voice AI have been outstanding on both fronts. The customer response has been very positive, and our team members really enjoy having what they call an extra pair of hands in the restaurant to help them operate the store. Our rollout pace this year has been much faster than we originally envisioned going into the year, and I think that speaks to how our operators are seeing the capability and how our franchisees are seeing the capability."
},
{
"speaker": "Operator",
"content": "The next question comes from John Ivankoe from JPMorgan."
},
{
"speaker": "John Ivankoe",
"content": "In your prepared remarks, you really did touch on many digital initiatives, many of which have yet to get to the hands of franchisees fully, especially on a global basis. So the question is on the previous Yum! language bending the curve on G&A. If there's not further opportunity in '25, you talked about it there is, longer term, how much of an opportunity do we have to use fee collection from franchisees that will significantly drive their own profitability and ease of running their own businesses to kind of think about fee recapture, if you will, on a basis points of franchisee sales basis. I mean your sales base is so big, collecting even 50 or 100 basis points of franchise sales would obviously be very significant in terms of your total G&A spend. So I wanted to see if we could have an opportunity today to kind of think about the longer-term potential of that?"
},
{
"speaker": "David Gibbs",
"content": "Yes. Thanks, John. Just a couple of high-level comments on that. I know you and David asked a similar question in that regard. Our goal with technology is to give our franchisees the absolute best technology in the industry, better than any of our peers at the lowest possible cost, better than they can get anywhere else. That is our north star when it comes to tech. We know that if they get that tech in their restaurants and it drives sales and drives improvement in their business models, like voice AI is doing improving their margins by cutting labor, they’ll build more stores, top line will grow more. And that’s the best way for us to leverage technology to drive profitability in the business. Of course, we’re making investments. We will recover those investments. But voice AI is a great example. We’re providing that to our franchisees at what we believe is a much lower cost than our competitors in the industry are having to pay for other third-party solutions. And we will continue to do that, and that is our mission."
},
{
"speaker": "Operator",
"content": "The next question comes from David Tarantino from Baird."
},
{
"speaker": "David Tarantino",
"content": "My question, David, I think you mentioned that as part of your response to a question, that the comp trend you saw in the third quarter carried over into Q4. I just wanted to make sure that, that comment was directly related to Taco Bell and not the global business. And I guess, secondly, I was wondering if you could comment on the KFC segment, and the comparison does get quite a bit better or easier in the fourth quarter, but I know you still have some macro pressures you're dealing with. So any sort of directional commentary on the KFC business and how we should think about that for the fourth quarter would be great."
},
{
"speaker": "David Gibbs",
"content": "Yes. On Taco, if the comment was on Taco Bell in terms of sales trends where we sit in the quarter, we feel good about being able to continue the momentum from Q3, but in the U.S. and internationally. Now of course, Taco Bell is a little bit easier to forecast because Taco Bell’s global store footprint is really unaffected by the conflict. It’s a lot harder to forecast KFC. What I will say is we haven’t really gotten to the point where even though we’re past the 1-year anniversary of the conflict, we haven’t gotten to the point where it really started to impact sales. So we don’t know how sales will behave once we get to that lap. But certainly, the lap will get better, and that should lead to a change in the trajectory of the KFC sales."
},
{
"speaker": "Operator",
"content": "That is the end of the Q&A session. So I'll now hand over to David Gibbs for closing remarks."
},
{
"speaker": "David Gibbs",
"content": "Great. I appreciate everybody’s time today. We’re excited about the upcoming January 28 Taco Bell Investor Day. So if you don’t have that circled on your calendar, please do, and we’re looking forward to seeing you out in Irvine, in California and L.A. then for that meeting. We’ve got a lot of exciting stuff to share about Taco Bell. Thanks for everybody’s time today."
},
{
"speaker": "Operator",
"content": "This concludes today's conference call. Thank you for joining, everybody. You may now disconnect your lines."
}
] |
yum | 2,024 | 2 | [
{
"speaker": "Operator",
"content": "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."
},
{
"speaker": "Matt Morris",
"content": "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. Before we get started, please note that this call includes forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements are made only as of the date of this call and should be considered in conjunction with the cautionary statement in the earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings release and the relevant sections of our filings with the SEC to find disclosures, definitions and reconciliations of non-GAAP financial measures and other metrics used on today's call. Please note that during today's call, all system sales growth and operating profit growth results exclude the impact of foreign currency. As a reminder, several of the Yum! Brands business units report on a period calendar basis including all US and Canada brands, KFC UK and KFC Australia. When forecasting 2024, please keep in mind this year will include an extra week in the fourth quarter for those entities. For more information on our reporting calendar for each market, please visit the Financial Reports section of the IR website. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. We would like to make you aware of the upcoming Yum! investor events and the following. Our third quarter earnings will be released on November 5th with the conference call on same day. Finally, on our last call, we shared the timing for our talk about consumer date originally planned for December of this year. We are finalizing a revised date for early next year. Please stay tuned for more details and invitations to follow. Now I'd like to turn the call over to David Gibbs."
},
{
"speaker": "David Gibbs",
"content": "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."
},
{
"speaker": "Chris Turner",
"content": "Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our bold restaurant development and unmatched operating capability growth drivers, our balance sheet and capital strategy, and provide an update on our outlook for the remainder of the year. Beginning with our second quarter results. System sales grew 3%, driven by 5% unit growth. Consumer sentiment relating to the conflict in the Middle East continued to pressure system sales growth in the quarter. The recovery trajectory we observed in Q1 for the Middle East, Malaysia and Indonesia, flattened in Q2. And while hard to precisely quantify, we continue to observe conflict-related impacts in a broader set of markets. Despite these pressures, Yum! delivered an impressive 10% core operating profit growth, reflecting the resilience of our scale, global, multi-brand business model, increasing benefits of our digital and technology strategy and the expert management of the business by our leaders around the globe. A prime example of factors underpinning our resilience was profitability in our 488 company-owned Taco Bell stores in the US, our single largest estate of company-owned stores, representing approximately half of our total global company-owned store revenue. Store level margins were 25.6% with mature stores achieving over 27%, reflecting the strength of the Taco Bell business model and its magic formula, which enables the brand to simultaneously deliver an outstanding consumer experience, tremendous consumer value and exceptional store-level margins for our franchisees and Yum! Importantly, Taco Bell operations leaders are taking advantage of the continued growth in digital sales mix, which is now 35% to further digitally enable our operations in ways that not only improve consumer and team experiences, but also improve labor productivity. Another contributor to profit growth was improved expense leverage. As we shared in January, we expected throughout the year to see the benefits of our ongoing resource optimization program, which strategically leverages our scale to free up general and administrative expense for reinvestment in future growth drivers such as AI, which will benefit both Yum! and our franchisees in addition to some beneficial onetime G&A expense overlaps. Second quarter ex-special G&A expense was $256 million, down 9% year-over-year. Reported G&A was $281 million, reflecting $25 million of special expense related to our resource optimization program. We expect to generate additional savings on an ex-special basis from the resource optimization program in the second half of the year. Reported operating profit increased 6% as foreign currency translation continued to be a headwind with a $12 million negative impact in the quarter. Historically, given our global footprint, foreign currency translation has at times been a significant tailwind to our reported operating profit and at other times, a headwind. Since interest rates in the US began to rise in Q1 2022, our current annual operating profit reflects a headwind of nearly $180 million in foreign currency, equivalent to roughly one year of operating profit growth under our long-term growth algorithm during that period. Second quarter ex-special EPS was $1.35, reflecting a $0.20 negative impact from a higher year-over-year tax rate and lower year-over-year investment gains. Additionally, foreign currency translation unfavorably impacted Q2 EPS by $0.03. Moving on to our bold restaurant development growth driver. Yum! opened 894 units, the second highest number of Q2 gross openings in Yum!'s history, leading to our unit count expanding 5% year-over-year, contributing 4 points to total system sales growth. In the quarter, we transferred certain rights related to the trademarks of the Gino's Pizza and Telepizza brands in Latin in Latin America to our local franchisee, enabling our teams and Latin America to focus exclusively on driving growth in the Pizza Hut brand. As a result, we removed 120 low volume and low royalty rate units associated with those brands from our store base in exchange for nominal compensation. Excluding the impact of this transfer, our unit growth was 6%. Our growth remains diversified across brands and countries with 195 brand country combinations contributing growth during the last 12 months. Moving to brand-specific development. In the KFC division, we opened 598 units across 57 countries. This brings our year-to-date gross openings in KFC to 1,107 units, a new all-time record for KFC for the first half of the year. China, India, Thailand and Japan led development. Over the last year, we've seen positive development trends in South Africa, the Philippines and Brazil. In the quarter, we closed on the transaction to purchase 216 stores in the UK and Ireland, one of our highest average annual unit volume markets. Our total equity estate at KFC is now 434 stores, the majority of which are located in the UK market. The Pizza Hut division opened 236 units across 30 countries. Pizza Hut's year-over-year unit growth is trending higher from this time last year for several of our largest markets, including China and Japan, which is offsetting closures in the US and the conflict-related slowing of development in Indonesia and Malaysia. At Taco Bell, we opened 56 units this quarter, including 17 new units in our international markets across 10 countries. Our US gross openings are running higher year-over-year for the first half, and we expect international store growth to pick up in the second half of the year. Excluding China, Taco Bell international unit count was up 7% year-over-year. Moving to our digital and technology initiatives. You will recall that on our last earnings call, David and I discussed our journey to become the leading global digital restaurant company. The first phase of this journey is focused on acquiring, building and scaling a comprehensive suite of owned platforms that enable ownership of our data, control the digital ecosystem, speed of innovation and cost advantages through scale leverage. Within this phase, we are accelerating deployment of our foundational platforms, such as the Poseidon POS system, Yum! e-commerce platform, Dragontail, SuperApp and our Global Data Hub. In the next phase, we are focused on maximizing the value creation potential of our platforms through AI and leveraging our extensive data assets. Data is becoming a crucial differentiator, enabling us and our franchisees to generate better insights and make better decisions. We believe we are still only scratching the surface of the full value creation potential of our capabilities. Let me now discuss additional digital and technology accomplishments for Q2 across our easy experiences, easy operations and easy insights pillars. I will begin with our easy experience pillar, focused on providing frictionless experiences to our consumers. As you recall, last quarter, we discussed plans to expand drive-through Voice AI technology to more Taco Bell stores. I'm excited to announce that given our encouraging early results, the team has accelerated the rollout. And as of today, we now have this technology operational in over 100 Taco Bell stores. We plan to scale the technology to several hundred stores by year-end, while the pilot test is underway in KFC Australia. In our tests, we have witnessed consistent consumer experiences and higher team member productivity. This technology leverages digital menu boards, which will be a Taco Bell brand standard in 2025 and Yum!'s proprietary point-of-sale system, Poseidon. On the e-commerce front, we have made significant progress in implementing the Yum! commerce platform at Pizza Hut US. We are currently transitioning to this platform at Pizza Hut in the UK, which will be the second international Pizza Hut market to operate on the Yum! commerce platform with Pizza Hut Canada next in line. Next, I'll discuss our easy operations pillar, where we continue to deploy our world-class technology to provide our franchisees and team members with the capabilities to operate their stores more effectively and efficiently. We have fully deployed our Poseidon point-of-sale system within Taco Bell US and are in the early stages of incorporating this system into the KFC US estate. With respect to Dragontail, our AI-enabled restaurant management system, we plan to have the system rolled out to nearly the entire Pizza Hut US system by year-end. As an example of Dragontail's impact, in the first 1,000 Pizza Hut US stores to implement the technology, we have measured a 7% increase in overall consumer satisfaction due to hotter and fresher pizzas leading to improved consumer frequency. Finally, we are in the process of scaling SuperApp, our restaurant General Manager support app at Pizza Hut US, and we plan to achieve the 10,000 store milestone across KFC globally by year-end. Lastly, I'll discuss our easy insights pillar. We deepened our AI pursuits this quarter, taking steps to unlock the benefits of our R.E.D 360 database and engage with an innovative start-up in the AI-driven personalization space to leverage our massive first-party data assets. This partnership covers the application and integration of a deep learning AI approach known as reinforcement learning, which we expect to be broadly and easily scalable across brands. This partnership will focus on our basic CRM channels and in the future, may extend to our other consumer sales and communications channels, for instance, paid media. Next, I'll provide an update on our balance sheet and liquidity position. As a reminder, our capital priorities are guided by maximizing shareholder value and include investing in the business, maintaining a resilient balance sheet, offering a competitive dividend and returning excess cash to our shareholders. Net capital expenditures for the quarter were $31 million, reflecting $50 million in gross CapEx and $19 million in refranchising proceeds. Our net leverage ratio ended the quarter at 4.1 times. We have a strong balance sheet and no debt maturities until 2026. During the second quarter, we are pleased to have resumed share repurchases by buying back $50 million in our stock, which for context is the same value of shares repurchased during the entire year of 2023. Going forward, absent any attractive investment opportunities like our recent acquisition of KFC UK restaurants, we plan to continue to return excess cash flow to shareholders through share repurchases. Finally, I'll discuss our outlook on the balance of 2024. We remain on track to achieve 5% unit growth for the full year despite the extended impact the Middle East conflict. On a global basis, our planned number of gross unit openings for the full year is expected to be similar to our number of gross openings in 2023. We should also note some certainty on the future path in the Middle East markets. For example, there are approximately 210 restaurants currently temporarily closed across the Middle East, Malaysia and Indonesia. While there are plans in place to reopen some of those restaurants starting later this month and throughout the second half of the year, there is risk that some could close permanently pending the future trajectory the conflict impact. These stores have not been producing royalties while temporarily closed, but our reported unit count would be negatively impacted if these stores were to permanently close. With respect to company store profitability, we expect full year Taco Bell company-operated store margins to be in the range of 23% to 24%. Regarding G&A. Excluding 53rd week, we now expect ex-special G&A expense to be lower on a year-over-year basis by a low single-digit percentage. As for sequencing, Q3 G&A will be higher year-over-year as we lap last year's recovery of cyber-related insurance proceeds and as we incur costs relating to our Global Leadership Summit. Finally, despite updating our balance of year sales outlook to reflect the continued softness we're seeing tied to the Middle East conflict, we remain confident that we will deliver at least 8% core operating profit growth on a full year basis excluding the benefit of the 53rd week. I'm very proud of the work our teams continue to do to position Yum! as a resilient growth business going forward and to further cement Yum! as the global franchisor of choice. We are making incredible strides toward our distinctive digital and technology ambitions, our 50% plus digital sales mix and our continued rollout of distinctive digital and AI technologies are testaments to that pursuit. In markets around the world, we have the privilege of working with outstanding 3C that is capable, well-capitalized and committed franchisees who want to grow with our system and our iconic brands. With that, operator, we are ready to take any questions."
},
{
"speaker": "Operator",
"content": "[Operator Instructions] Our first question comes from David Tarantino from Baird. David, your line is muted. Please proceed with your question."
},
{
"speaker": "David Tarantino",
"content": "Hi, good morning. My question is on your outlook, given all the cross currents we're seeing in the macro environment. And I was wondering if you could maybe elaborate on how you're thinking the same-store sales could progress with the second half plays out. And I know you have easing comparisons, but there's a lot of a lot of uncertainty in a lot of markets that you called out. So just wondering, if you could provide some context on how you're thinking about it within your 8% profit growth or core profit guidance for the year? Thanks."
},
{
"speaker": "David Gibbs",
"content": "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."
},
{
"speaker": "Operator",
"content": "Thank you. Our next question comes from Jon Tower from Citi. Jon, please go ahead."
},
{
"speaker": "Jon Tower",
"content": "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?"
},
{
"speaker": "Chris Turner",
"content": "Yeah. Thanks, Jon. Look, I think what you're seeing happen this year is the plan that our management team has been driving is playing out as expected. If I were to kind of sum up what we're doing, we're reallocating and streamlining our G&A to drive faster and more efficient growth for Yum! and for our franchisees. And there's a few buckets of levers that are driving that. Of course, we've said that there are some one-time benefits this year on a net basis with the full year. The second, digital and technology is an important area here. So we talked about that this year, we're starting to bend the curve. And what we mean by that is, over the past few years, we invested ahead on behalf of our franchisees, which burdened the P&L a bit. But as we get more and more adoption of our platforms and we have fee income from that, it reduces that burden. We also acquired four companies, hired a lot of people in the last several years. Those capabilities are maturing. And as we mature, we find ways to operate more effectively internally to organize better, and that allows us to get more done at lower cost, which benefits Yum! and our franchisees. And we've got strong governance of tech spend in place. I think the third area is productivity in other parts of the business. We've been driving this resource optimization program. We're finding ways to operate more effectively in parts outside of D&T. Now in some cases, that's enabled by becoming a more digital company. And then finally, as we said in the remarks, our GMs are doing a really good job driving their plans as they see how the business is on pulling around the globe. So those are factors that are driving the G&A trends this year. Now it's important to note that we are reinvesting at the same time. We're putting investments into AI. We mentioned on the last call, 40-plus AI projects in motion. We're investing in areas like our marketing capabilities, supply chain and then culture and talent. So at the same time, we're driving the long-term health of the business. If you look to 2025 and beyond, we're going to continue to get leverage on the G&A line. You set aside year-over-year factors like changes in incentive comp, we expect to get good leverage on the G&A line, and I think you'll see a normal growth rate in terms of G&A for an asset like a company ours."
},
{
"speaker": "Operator",
"content": "Thank you. Our next question comes from Andrew Charles from TD Cowen. Andrew, please go ahead."
},
{
"speaker": "Andrew Charles",
"content": "Great. Thank you. I have a two-part question on Taco Bell. I'm looking to understand how you retain Taco Bell's US 2Q same-store sales strength as you shift promotional -- to new menu items away from Cantina Chicken while the remainder of the drive-through segment intensified the focus on value. And the bigger question is that can you share your confidence in the ability to hold Taco Bell's 2Q to your trends in the back half of 2024? Thanks."
},
{
"speaker": "David Gibbs",
"content": "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."
},
{
"speaker": "Operator",
"content": "Thank you. Our next question comes from Brian Bittner from Oppenheimer. Brian, please go ahead."
},
{
"speaker": "Brian Bittner",
"content": "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?"
},
{
"speaker": "Chris Turner",
"content": "Yeah, Brian, as we said on the call, we remain confident in delivering at least 8%. Of course, as you mentioned, it's a complex operating environment. There are lots of unknown still yet to unfold in the back part of the year. But as David said, we do have sequential improvement in the forecast quarter-to-quarter from a sales standpoint. And as we said, we expect full year G&A to be balanced. We're going into the back half of the year with a good starting point here at the midpoint. And it's our job to deliver as much profit growth as possible, while still investing in the long-term health of the business. And so that's what our management teams are focused on doing, driving the short-term and the long-term simultaneously."
},
{
"speaker": "Operator",
"content": "Thank you. Our next question comes from Dennis Geiger from UBS. Dennis, please go ahead."
},
{
"speaker": "Dennis Geiger",
"content": "Great. Thank you. I wanted to ask a little bit more about the strength of global unit development. Obviously, some macro pressures out there, but impressive growth, even still, particularly at KFC. Could you talk a little bit more about how the brands and the franchisees are effectively managing the challenges, continuing to open restaurants at a solid rate? And specifically, if there's anything else to offer on visibility that you've got into development looking ahead, including how that pipeline looks, et cetera? Thank you."
},
{
"speaker": "David Gibbs",
"content": "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."
},
{
"speaker": "Operator",
"content": "Thank you. Our next question comes from Brian Harbour from Morgan Stanley. Brian, please go ahead."
},
{
"speaker": "Brian Harbour",
"content": "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?"
},
{
"speaker": "David Gibbs",
"content": "Look, I think in general, we've highlighted, obviously, the Middle East markets have been impacted in addition to Indonesia and Malaysia in terms of significant markets for us. Beyond that, we're not going to -- first of all, it's very hard to pull out the impact because it can be trade area trade area by in a given market. But you can imagine the types of markets that would be further impacted. And it's not -- but it's not a precise science. We just know them from the stories that we're hearing from the field some of the data that we see trade area by trade area in markets that the impact is a little bit broader than just the Middle East and Indonesia and Malaysia, but very hard to measure. I think the important thing is, despite all that, I mentioned it at the start -- the Q&A, we've seen 11% two-year same-store sales growth for KFC around the world. If we back out and just take a look at some of the markets where we know there's very little impact from the Middle East, we're seeing mid-single-digit growth for KFC. And then places like LA&C, which really are a clean read on our business ex-Middle East, no impact at all, we're seeing -- they put the second -- KFC put up a second consecutive quarter of plus 13% same-store sales growth that's on top of 10% last year. So it's 23% same-store sales growth in Latin America for KFC. You can tell that the foundation of our business is really quite strong. And we're getting through this headwind from the Middle East really as best as could be imagined."
},
{
"speaker": "Matt Morris",
"content": "Operator, we have time for one more question."
},
{
"speaker": "Operator",
"content": "Thank you. So our final question comes from Danilo Gargiulo from Bernstein. Danilo, please go ahead."
},
{
"speaker": "Danilo Gargiulo",
"content": "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."
},
{
"speaker": "Chris Turner",
"content": "Yeah. Thanks, Danilo. Look, I think the Taco Bell margin story is very impressive in the context of a value-oriented environment. The Taco Bell business is serving consumers, creating buzz in the market, bringing great innovation to bear and delivering value when consumers need it. And yet you're seeing us maintain these industry-leading margins. That comes from leveraging our scale on our food purchases and our franchisees take advantage of that scale. And I think in the long run, you'll see us continue to be more and more productive in terms of how we operate the restaurants. As we become more and more digital, 35% digital mix, you heard us talk about Voice AI, which is accelerating at a faster pace than we expected just three months ago. And that is just one more example of a digital lever that allows us to provide a great a great customer experience, team member experience and be more productive in back of house. Lots of other things happening on that front, I think it sets up well for us to continue to be able to provide strong value to consumers and great margins for -- for our franchisees and our company stores going forward."
},
{
"speaker": "David Gibbs",
"content": "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."
},
{
"speaker": "Operator",
"content": "This concludes today's conference call. You may now disconnect your lines."
}
] |
yum | 2,024 | 1 | [
{
"speaker": "Operator",
"content": "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]."
},
{
"speaker": "",
"content": "I will now hand over to your host, Matt Morris, Head of Investor Relations to begin. Matt, please go ahead."
},
{
"speaker": "Matt Morris",
"content": "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."
},
{
"speaker": "",
"content": "Before we get started, please note that this call includes forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements are made only as of the date of this call and should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings release and the relevant sections of our filings with the SEC to find disclosures, definitions and reconciliations of non-GAAP financial measures and other metrics used on today's call."
},
{
"speaker": "",
"content": "Please note that during today's call, all system sales growth and operating profit growth results exclude the impact of foreign currency. On our last earnings call, we announced that we signed an agreement to acquire 218 KFC franchise restaurants in U.K. and Ireland. The transaction closed on April 29. As a reminder, several of Yum! Brands business units report on a period calendar basis, including all U.S. and Canada brands, KFC U.K. and KFC Australia. For business units that report on a period basis, first quarter same-store sales growth excludes the benefit from the additional day of sales owing to Leap Day. When forecasting 2024, please keep in mind this year will include an extra week in the fourth quarter for those entities. For more information on our reporting calendar for each market, please visit the Financial Reports section of the IR website."
},
{
"speaker": "",
"content": "We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. We would like to make you aware of upcoming Yum! investor events and the following. Our second quarter earnings will be released on August 6 with a conference call on the same day. Finally, please mark your calendars for an in-person Taco Bell Consumer Day on December 10 at the Taco Bell headquarters in Irvine, California. Stay tuned for more details and invitations to follow."
},
{
"speaker": "",
"content": "Now I'd like to turn the call over to David Gibbs."
},
{
"speaker": "David Gibbs",
"content": "Thank you, Matt, and good morning, everyone. I'm pleased to report that Yum! grew core operating profit 6% this quarter despite a challenging operating environment, demonstrating the resilience of our business. As we communicated last earnings, 1Q should represent our most challenging sales quarter this year as we work through tough year ago laps, return to a more normal inflationary environment and navigated discrete consumer demand pressures. While the impacts from the Middle East conflict have been scattered and difficult to measure, we've begun to see improvement in the most impacted markets."
},
{
"speaker": "",
"content": "Taco Bell U.S. outperformed the industry on same-store sales and delivered industry-leading margins, while 1Q unit openings at KFC International set us up for a strong unit growth story in 2024. We continue to make significant progress scaling our proprietary digital and AI-powered platforms and are excited by plans to accelerate deployment. Digital sales continued an upward trajectory approaching $8 billion and were up 11% year-over-year. Through continued kiosk deployment, greater adoption of click-and-collect and stable third-party aggregator sales, digital mix improved 5 points and, for the first time ever, represented over 50% of system sales in Q1. We now have $30 billion in annualized digital sales, which by itself would represent one of the largest restaurant companies in the world."
},
{
"speaker": "",
"content": "Overall, despite a more challenged operating environment, we have reached impressive new milestones and remain on track to deliver on our long-term growth algorithm target of at least 8% core operating profit growth for the full year."
},
{
"speaker": "",
"content": "Now I'll discuss our Relevant, Easy and Distinctive brands, or R.E.D. for short, followed by our Unrivaled Culture and Talent and Good Growth strategy. Chris will then provide an update on our first quarter results, followed by our Bold Restaurant Development, Unmatched Operating Capabilities and balance sheet position."
},
{
"speaker": "",
"content": "Starting with the KFC division, which accounts for 51% of our divisional operating profit. KFC grew system sales 4% this quarter, owing to an 8% unit growth and a 2% decline in same-store sales. The same-store sales pressure was partially attributable to impacts from the conflict in the Middle East, which have begun to ease, and we expect a 2-year trend for KFC International overall to accelerate in the same quarter. We saw strong top line growth in other parts of the world including Latin America, Africa and Greater Asia. System sales in Latin America grew 22% on the heels of a strong marketing calendar and continued success of the KFC original nugget. In Africa, system sales grew 11%, thanks to 5% same-store sales growth driven by product innovation and 6% net new unit growth. In Greater Asia where system sales grew 8%, we recently partnered with a new franchisee in Korea, who is driving transaction growth with a calendar focused on core, value and expanding consumer access, which resulted in a 26% growth in same-store sales."
},
{
"speaker": "",
"content": "At KFC U.S., same-store sales were pressured from unfavorable weather events and chicken value promotions from QSR competitors."
},
{
"speaker": "",
"content": "Moving on to the Taco Bell division, which represents 35% of our divisional operating profit and 75% of our U.S. divisional operating profit. System sales at Taco Bell U.S. grew 4%, led by 2% same-store sales growth and a strong outcome on top of last year's 9% same sales growth. Sales improved throughout the quarter after difficult weather events in January. Taco Bell focused on key levers within its magic formula to drive growth, including building brand buzz, providing value to our consumers and expanding into new category entry points. We know that when we execute on this magic formula, Taco Bell puts itself at the center of the cultural conversation."
},
{
"speaker": "",
"content": "There was no better example of this than the Live Mas live event Taco Bell held in Las Vegas to share its upcoming innovation calendar, an industry-first event. Of course, it was not surprising that Fast Company named Taco Bell the Most Innovative Company in Dining and #8 overall. Early in the quarter, the team launched a new cravings value menu and ended the quarter with a successful launch of the Chicken Cantina menu. The cravings value menu features industry-leading value with 10 items priced under dollars providing consumers with craveable everyday value offering. Nearly 1/3 of transactions contain an item off the cravings value menu and, when purchased, 80% have at least one other item added, translating to a nearly 10% check uplift compared to non-cravings value menu checks."
},
{
"speaker": "",
"content": "The impressive performance of such product launches is compounded by Taco Bell's ability to deliver industry-leading margins on top of a great consumer experience. At Taco Bell International, system sales grew 6% this quarter. The team is focused on building brand category awareness globally. This included markets such as Canada and Latin America where the team elevated the core menu and launched the Chicken Cantina menu to expand their consumer base."
},
{
"speaker": "",
"content": "Next, at the Pizza Hut division, which comprises 15% of our divisional operating profit. During the first quarter, system sales declined 4% with 5% unit growth and a 7% decline in same-store sales. The year-over-year growth rate in same-store sales was suppressed from difficult year ago lapse and the ongoing impact from the conflict in the Middle East. The team continued to focus on the individual meal occasion this quarter with the India market launching the Melts platform. At Pizza Hut U.S., same-store sales declined 6% as we lapped the launch of Melts and Big New Yorker Pizza. However, the 2-year trend was positive and improved from last quarter."
},
{
"speaker": "",
"content": "Lastly, at The Habit Burger Grill, for the first quarter, system sales declined 2% with 6% unit growth. Margin trends improved throughout the quarter with a combination of initiatives leading to a 60 basis point improvement in store level margins year-over-year."
},
{
"speaker": "",
"content": "Now I'll turn to our Good Growth strategy, starting with our people pillar. Effective June 1, Alex Barsk will join KFC Global as the new Chief Financial Officer. Alex is joining from Pizza Hut, where she most recently served as global CFO. Alex joined Pizza Hut in 2015 and has held several leadership roles across strategy, finance, development and supply chain. Alex's transition is another great example of Yum! leveraging its talent across brands to help share unique learnings and experiences."
},
{
"speaker": "",
"content": "To round out our people pillar, I'd like to congratulate and thank Yum's! Senior Vice President of Finance, Corporate Controller and my friend, Dave Russell, who recently celebrated his 25th anniversary at Yum! with today marking his 100th quarterly earnings announcement. Dave has been with the company since 1999, always serving as a trusted leader who brings his deep knowledge and analytical perspective to our finance and accounting function. Thank you, Dave, for your dedication to our growth over the last 25 years, and I look forward to your continued partnership in the future."
},
{
"speaker": "",
"content": "Before I hand it over to Chris, I would like to share a few thoughts on the future of our digital and technology strategy given we achieved an important milestone this quarter with more than half of our sales coming from digital. You'll recall that the first phase of our journey to become the leading global digital restaurant company began in earnest in 2019. That first phase focused on building or acquiring a comprehensive suite of owned platforms, spanning Easy Experiences, Easy Operations and Easy Insights and accelerating deployment of those platforms across our brands and markets. While we still have further to go in deploying these platforms, we have achieved critical mass in several areas."
},
{
"speaker": "",
"content": "Taco Bell U.S., one of our twin growth engines, has achieved the most extensive deployment of key platforms, including the Poseidon POS system, the Yum! e-commerce platform and the AIM, inventory management platform. Our other primary growth engine, KFC International, has been accelerating the rollout of those same platforms and is our leader in deploying in-store kiosk technology. Pizza Hut, of course, has been our leader in deploying Dragontail to thousands of restaurants around the globe. Behind the scenes, our global data hub houses data generated from these platforms."
},
{
"speaker": "",
"content": "The deployment of our capabilities in this first phase of our journey has driven the dramatic increase in our digital sales from approximately 20% in 2019 to over 50% now. The impact of this growth has been significant. To share just a couple of examples of impact, our consumers enjoy more convenient and frictionless experiences, leading to high frequency and check sizes. Our franchisees enjoy significant productivity benefits as their team members no longer spend time taking orders and payments for half of all transactions, leading to stronger unit economics. We believe we are still only scratching the surface of the full value creation potential of our capabilities."
},
{
"speaker": "",
"content": "While the first phase of work in deploying our platforms will continue, given the critical mass we have achieved, we have initiated a second parallel phase in our technology journey. This second phase will focus on maximizing the value creation potential of our platforms through the acceleration of AI capabilities in combination with fully leveraging the immense data assets we now own. With our platform-driven approach, we can now more easily integrate AI capabilities across our digital ecosystem. We currently have more than 40 AI initiatives in progress across the company spanning marketing, operations, insights, engineering and our internal back-office functions."
},
{
"speaker": "",
"content": "While many of these initiatives will remain confidential for now, one example that we have shared publicly is voice AI to enhance our consumer experience. We've been testing this capability at the drive-thru in 5 Taco Bell stores in California. We are expanding that test to 30 stores in Q2 based on positive consumer feedback. Another example is our piloting of AI-powered technology in our Super App restaurant general manager support tool, making it even easier and faster for managers to access critical operational information to make better decisions. Of course, our Dragontail platform was the first AI-enabled next-gen restaurant operational system to enhance the consumer and team member experience in a multichannel fulfillment environment."
},
{
"speaker": "",
"content": "As an example of how we are elevating the use of our data assets, in Q1, we launched the R.E.D. 360 U.S. Consumer Data Insights system. As of Q1, both Pizza Hut U.S. and Taco Bell U.S. have integrated into the system and KFC U.S. will integrate in the second quarter. This system allows us to leverage insights into consumer behavior across our brands in the U.S. After full deployment, R.E.D. 360 will be the first scaled cross-brand U.S. restaurant consumer data engine in the quick service industry and will pave the way for unique insights and personalization opportunities on digital and social channels."
},
{
"speaker": "",
"content": "For those who may have missed it, Joe Park, our Chief Digital and Technology Officer, was recently interviewed in The Wall Street Journal, bringing to life many of these plans as we become more focused on pursuing AI and data-driven innovation. As we do all of this, we are also continually innovating how our technology teams work internally to better leverage our scale so that we can continue to bend the curve on the net investment impact of these digital and technology initiatives."
},
{
"speaker": "",
"content": "To sum it up, we are excited about having ramped up this second phase in our journey and are doubling down and pursuing the ultimate goal of our digital and technology strategy, which is to better serve our franchisees, providing them with more, better, faster, cheaper and safer technology while simultaneously delighting consumers and maximizing Yum! shareholders' returns. We will continue to provide updates on both phases of our journey on future calls, organized around our easy capability framework."
},
{
"speaker": "",
"content": "In closing, as I look back over the quarter, I'm proud of our teams and their ability to navigate any environment as our brands stand for unmatched value and convenience, providing a range of products and price points to meet any consumers' needs. Our resilient business model, coupled with our strategy to leverage our technology platforms on a global scale, gives me confidence we will continue to improve both franchisee and Yum! economics. Looking ahead, our initiatives to become an even more nimble and data-driven organization are underway, and I'm excited for the shareholder value we will create."
},
{
"speaker": "",
"content": "With that, Chris, over to you."
},
{
"speaker": "Christopher Turner",
"content": "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."
},
{
"speaker": "",
"content": "Starting with our results. First quarter system sales grew by 2% driven by 6% unit growth. As we communicated on our last call, we expected the first quarter to be our most challenged from a same-store sales perspective due to prior year lapse, a return to a more normal inflationary environment and discrete consumer demand pressures, including markets impacted by the Middle East conflict. We believe the markets most impacted by the conflict collectively created a low single-digit headwind on Yum!'s overall Q1 same-store sales. Despite these challenges, I'm pleased to report Yum! delivered 6% core operating profit growth exceeding our internal plan and demonstrating the resilience of our profit model."
},
{
"speaker": "",
"content": "First quarter ex special general and administrative expenses were $265 million, down 4% year-over-year, a continuation of the G&A momentum we had in the fourth quarter. Reported G&A was $286 million and includes $21 million in special expense related to ongoing resource optimization, which we expect to generate additional savings in the second half. Reported operating profit included a 2-point impact in the quarter from foreign currency translation. First quarter ex special EPS was $1.15, which includes negative after-tax impacts of $0.08 from investment losses and $0.03 from foreign currency translation."
},
{
"speaker": "",
"content": "As a reminder, we shared on our last call the intent to purchase 218 KFC U.K. and Ireland stores. We're excited to report we officially closed this acquisition at the end of April. These stores have average unit volumes above $2 million and healthy store level cash margins. We expect the addition of these units to provide approximately $40 million of incremental EBITDA in the 12 months after acquisition while the benefit to our operating profit will be largely offset over the next several years due to depreciation and amortization, including amortization of reacquired franchise rights."
},
{
"speaker": "",
"content": "Now let me share greater detail on our first quarter unit growth in the context of our Bold Restaurant Development growth driver. Yum! opened over 800 units in the first quarter. We reached the incredible milestone of opening KFC's 30,000th restaurant globally. As the #1 brand on Entrepreneur Magazine's Top Global Franchise rankings, KFC continues to demonstrate strong desirability among global franchisees with a new store opening every 3 hours. We continue to see an incremental store opportunity of 50,000 KFCs over the long term. Across the global system, the outlook for development in 2024 is strong. We expect to continue to open units in a broad range of markets, which last year included over 100 markets, and to cross the 60,000 unit milestone. Further solidifying Yum!'s position as the world's leading multi-brand restaurant franchisor."
},
{
"speaker": "",
"content": "There are several reasons we remain confident in these trends. First, we entered 2024 with broad-based development momentum. In Q1, we grew units across 81 brand-country combinations. Second, we have large, committed franchisees who have entered into more unit development commitments for 2024 than in each of the prior 2 years. Approximately 80% of 2024 exceeded new builds for KFC outside of China are part of development commitments."
},
{
"speaker": "",
"content": "Third, the development white space remains massive. We have just 6% of the global QSR market. China is a prolific developer and serves only 1/3 of the China population. In India, which is the fastest-growing global economy, KFC and Pizza Hut have been the fastest and third fastest-growing QSR chains, respectively, since 2019. Finally, our brands unit economics remain attractive across key markets where scale and first-mover advantages put our franchisees in a position of strength. Scale leads to unique advantages including access to alternative financing solutions, dedicated development teams and in-depth market knowledge. Scale also offers operating advantages. For instance, our largest partner, Yum China, has AI-enabled digital tools to allow its restaurant general managers to oversee multiple restaurants, creating unmatched savings that can be passed to consumers."
},
{
"speaker": "",
"content": "The Serrano Group based in Latin America and Ramcar based in the Philippines run their own poultry processing facilities in addition to distribution capabilities, giving them cost and reliability advantages."
},
{
"speaker": "",
"content": "At a brand level, KFC has food innovation kitchens in Canada, the U.S., Latin America and the Caribbean, United Kingdom, Thailand, Australia, South Africa, India and Singapore. Perhaps underappreciated, our global innovation capabilities are real sources of differentiation."
},
{
"speaker": "",
"content": "Moving now to the digital and technology front. Recall that our vision is to empower our franchisees with leading-edge technology solutions with advantaged economics. As David put it, we want to deliver more, better, faster, cheaper and safer technology to our franchise partners. We are advantaged by owning important foundational platforms such as our Poseidon POS system, Yum! e-commerce, Dragontail, Super App and our global data hub, and the impact of these platforms will grow exponentially as we deploy more of them to more stores. Data is becoming a crucial differentiator, enabling us and our franchisees to generate better insights and make better decisions."
},
{
"speaker": "",
"content": "On this front, quick service restaurants will benefit disproportionately because of the high frequency nature of our consumer visits, which results in more data. Within quick service, a few characteristics will separate us from our competitors, including our multi-brand portfolio, our scale and global footprint, our ownership of key platforms and the increasing integration between our platforms. We will leverage our data for insights and to drive more effective marketing and loyalty engagement, and we will deploy advanced AI tools to all aspects of our business. As we leverage our scale more and more in these areas, we can be faster, cheaper and safer through consistency and standardization across our environment."
},
{
"speaker": "",
"content": "Let me now discuss the digital and technology accomplishments for Q1 across our Easy Experiences, Easy Operations and Easy Insights pillars. Beginning with our Easy Experiences pillar. We continued to onboard Pizza Hut U.S. to the Yum! e-commerce platform with a full cutover planned by Q3, followed by 3 Pizza Hut international markets by year-end. For Taco Bell U.S., where the Yum! Commerce platform is fully operational, we have accelerated viral promotions and have seen Taco Bell's digital ordering capacity increase tenfold relative to the legacy system."
},
{
"speaker": "",
"content": "Within Easy Operations, the expansion of our world-class technology products and platforms continued. We expanded Poseidon to 1,800 Taco Bell U.S. restaurants, bringing our total to over 7,000 restaurants. We onboarded over 500 Pizza Hut restaurants onto the Dragontail AI platform, bringing our system total to over 7,000 restaurants. In the near future, we plan to nationally roll out Dragontail's kitchen display system and Poseidon to our KFC U.S. restaurants. Finally, our custom-built Super App, which provides smart, automated routine management tools for our restaurant managers, is now used in nearly 9,500 Pizza Hut and KFC restaurants with significant expansion plans underway for KFC."
},
{
"speaker": "",
"content": "For the third pillar of our Easy Strategy, Easy Insights, KFC and Pizza Hut have continued to scale a new experienced management program allowing the brands to draw insights from an expanded source of consumer reviews across digital channels, including third-party aggregators and social media in addition to guest survey responses. KFC is now live in 10,000 restaurants and has seen a fivefold increase in per-store data points. Pizza Hut expanded this service to 7,000 restaurants across more than 50 countries."
},
{
"speaker": "",
"content": "Talking about all of the tremendous advancements underway excites me about the future. This work will be vital as we embark on further innovation behind voice AI, restaurant automation and better leveraging our loyalty programs."
},
{
"speaker": "",
"content": "Next, I'll provide an update on our balance sheet and liquidity position. Net capital expenditures for the quarter were $38 million, reflecting $49 million in gross CapEx and $11 million in refranchising proceeds. Our net leverage ratio ended the quarter at 4.1x. In the quarter, we sold our minority investment in Devyani for $104 million, representing a $73 million increase in value since acquisition. Our cash balance ended at $652 million, reflecting proceeds from the Devyani investment sale and modest accumulation in cash to finance the KFC U.K. acquisition."
},
{
"speaker": "",
"content": "With the KFC U.K. deal behind us, our cash balance will return to a normalized rate of around $400 million, excluding the unrepatriated Devyani proceeds. Thereafter, with no significant debt maturities in 2024 or 2025, we plan to use our excess free cash flow primarily to fund share repurchases, absent accretive investments we choose to make. I will reiterate that our capital priorities are guided by maximizing shareholder value. This includes investing in the business, maintaining a resilient balance sheet, offering a competitive dividend and returning excess cash to our shareholders."
},
{
"speaker": "",
"content": "Subsequent to the quarter end, we renewed our pro rata credit facility, including our revolving credit facility and Term Loan A. We were pleased to renew the $2 billion facility with the same pricing and terms that we achieved in 2021 while also increasing the revolver from $1.25 billion to $1.5 billion."
},
{
"speaker": "",
"content": "Now let me discuss our latest outlook on full year 2024. We are confident that 2024 will showcase a strong unit development story at or above 5% unit growth, led by KFC International as franchisees capitalize on our brand's attractive paybacks. In the U.S., Taco Bell continues to balance core everyday value to cater to a more discerning consumer across income groups with premium innovation to attract new consumers. We expect full year Taco Bell company-operated margins to be in the range of 23% to 24%. Excluding the 53rd week, we now expect ex special G&A to be flat to down slightly for the year, including incremental G&A associated with the KFC U.K. acquisition. Finally, we are confident we will deliver at least 8% core operating profit growth excluding the benefit of the 53rd week."
},
{
"speaker": "",
"content": "To close, I am incredibly proud of the progress we have made over the last few years in the areas to which we dedicated our focus and internal resources. Our team continues to manage through industry challenges to position us for a strong year and deliver our long-term operating profit plan, reinforcing the resilience of our business, strength of our talent and commitment to our shareholders. Going forward, we are moving to solidify ourselves as the multi-brand franchisor of choice through a more efficient adaptable, data-driven organization. We are only in the early innings of unlocking the value of our unmatched data, which will help power our aspirations and deliver sustained, above-market shareholder returns."
},
{
"speaker": "",
"content": "With that, operator, we are ready to take any questions."
},
{
"speaker": "Operator",
"content": "[Operator Instructions] Our first question goes to Jon Tower of Citigroup."
},
{
"speaker": "Jon Tower",
"content": "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?"
},
{
"speaker": "Christopher Turner",
"content": "Yes. Thanks, Jon. Good question. First, let me just reiterate a couple of details on the G&A guidance. So we expect that ex special G&A on a 52-week basis will be flat to slightly down. As we mentioned on the last call, that assumes a target level of incentive compensation. So that's one factor that could move as we go through the year. But on the factors and levers that help us to achieve that plan first, there are some onetime factors at play. Examples of that include lapping the cyber event last year, a couple of small remnants of the Russia overlap and some lapse of incentive-based compensation last year. Now on the other side, we do have some expenses related to the acquisition of the stores in the U.K. We expect that will add just under $10 million to our G&A in year. But those are the [ best ] set of factors."
},
{
"speaker": "",
"content": "If we go to the longer-term levers that we're pulling, we continue to drive our resource optimization program, which has allowed us to find efficiencies in legacy parts of the business, part of which we've used to fund investments in the D&T strategy. You saw some special charges this quarter which included the impact of some of those moves that we make, but that helps to drive productivity in the business going forward."
},
{
"speaker": "",
"content": "And finally, as you say, we continue to bend the curve on the impact of our D&T investments on the P&L. This happens as we deploy more and more of our technology through increased franchisee adoption. And of course, we're continuing to better leverage our scale and how we operate internally in digital and technology, which is allowing us to do more together across the business. All of that is in service, delivering more, better, faster, cheaper and safer technology to our business, as David said earlier, but bending that curve is a part of the long-term plan."
},
{
"speaker": "Operator",
"content": "The next question goes to Brian Bittner of Oppenheimer & Co."
},
{
"speaker": "Brian Bittner",
"content": "You reiterated your 2024 target to grow core operating profit in line with your long-term algorithm of at least 8%. And that's impressive given the first quarter where comps were negative and core operating profit growth was below the full year outlook. And I'm assuming this was always built in the plan because of the tough comparisons, and I realize you have a lot of G&A flexibility to hit your operating profit targets. But the question is what's the global same-store sales base case that you're thinking is required for the rest of the year to comfortably reach your operating profit goals."
},
{
"speaker": "David Gibbs",
"content": "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."
},
{
"speaker": "Operator",
"content": "The next question goes to David Palmer of Evercore ISI."
},
{
"speaker": "David Palmer",
"content": "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?"
},
{
"speaker": "David Gibbs",
"content": "Thanks, David. Yes. Look, we feel great about our twin engines of growth, right? 80% of our profit comes from Taco Bell U.S. and KFC International. In the international business, to your question, 85% of our profit from KFC International. And if you look at the areas of the world that are less impacted by the Middle East, like Africa, for example, our system sales, you'll see in our release, was up 22%. Latin America, less impacted, really no impact, up 11% -- I'm sorry, Latin America, up 22%; Africa, up 11%. I recently actually made a trip to Africa this quarter with our team and was just blown away by the progress we're making on the ground there, where we're the leader in the industry, and we're widening our margin in terms of that leadership."
},
{
"speaker": "",
"content": "Whether it's South Africa, which we visited, or Kenya where we've got franchisees that used to be part of our -- the company's system, who's building our brand the right way there, launching breakfast, the employer of choice in the country, leveraging menu innovation to take and actually inspiring some of our innovation around the world. So if you look at places like that, the business is real healthy and doing well. The other -- the impacted parts of the world are obviously much more challenged. But we still see impressive results for KFC International growing system sales 6% in this environment. And if you adjust for Middle East, that's 8%, 9% kind of system sales growth."
},
{
"speaker": "",
"content": "And very importantly, we highlighted this in the earnings release, KFC International with net new unit growth up 10% shows the strength of the quality of the development pipeline that we have, which obviously bodes well for the future of the brand. But as far as the international consumer goes, it's probably more of an emphasis on value than there has been in past quarters. We're seeing the same thing in the U.S. That's one that we know with KFC, we're well equipped to navigate."
},
{
"speaker": "Operator",
"content": "The next question goes to John Ivankoe of JPMorgan."
},
{
"speaker": "John Ivankoe",
"content": "I was hoping to get maybe just a little bit more color on bending the curve on digital and technology spend, especially how it might influence '25 and '26 type of total G&A growth. I mean, I think this has been one of the more kind of debated topics of this -- on the Street as -- are we just talking about a lower rate of growth? Or might we actually see declines in dollars in '25 and '26 as you leverage the platform?"
},
{
"speaker": "",
"content": "And the follow-up to this, and I think it's very related, acquiring technology, building technology is one thing. But of course, maintaining technology with best-of-class technology talent, especially kind of at the leadership end, might be something different. So I just wanted to get your thoughts in terms of acquiring some of this tech talent and Yum!'s ability to both attract and retain this talent going forward as they may have other projects to work on in the future."
},
{
"speaker": "Christopher Turner",
"content": "Thanks, John. Look, if you go back over the last few years, we saw the importance of digital and technology to Yum's! future and we invested ahead on behalf of the system to build those capabilities and put them in place across Easy Experiences, Easy Operations and Easy Insights. We thought that was the right thing to do for the business, and it did create some pressure on the G&A line as we did it. As we deploy our platforms to more and more markets and we get increased adoption, of course, that happens when our franchisees see the business cases coming to life and the improvements in their economics and the way the technology impacts their consumers and their team members."
},
{
"speaker": "",
"content": "And we're, as we shared on the call, continuing to drive those deployments. In fact, we're now starting to bundle some of those deployments. At Taco Bell, for instance, we are driving both the AIM inventory management in addition to the Trax back-of-house system at KFC U.S. We'll be deploying the Dragontail kitchen display system along with the Poseidon POS system. So we're bundling those together. And as we create more and more examples and proof points of the impact, as we talk to franchisees in additional markets, it becomes easier to prove the business case that our technology is delivering. So that's what supports the long-term deployment path as we move forward."
},
{
"speaker": "",
"content": "Obviously, we have to continue to make investments in things like AI, better leveraging our data, as David mentioned, and as you said, in continuing to enhance the existing platforms that we have. But as we bend the curve, that reduces the net P&L impact over time. And so in the long run, we expect us to get increasing leverage on our G&A and the G&A as a percent of system sales should come down over the long run."
},
{
"speaker": "Operator",
"content": "The next question goes to Brian Harbour of Morgan Stanley."
},
{
"speaker": "Brian Harbour",
"content": "Maybe just following up on that. You spent a lot of time discussing all of these tech initiatives. I think it's probably a little bit harder for us to sort of observe that in terms of comp impact, margin impact. Obviously, we don't kind of see franchisee profitability. But are there any examples you can give of, for example, e-commerce was deployed in certain restaurants and you saw a certain uplift in sales or franchisee profits, what happens to those when you deploy that tech bundle that you just mentioned? I think that would just sort of bring it to life more for us."
},
{
"speaker": "Christopher Turner",
"content": "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."
},
{
"speaker": "",
"content": "Now as you said, you don't see all of our franchisees' P&Ls. But on the productivity side for our franchisees, I think our development momentum is the best proof point that digital is adding to unit economics. That's the driver of us continuing to set records on unit development around the globe, and the digital and technology impacts on their P&L is an important part of that. So all of that is enhancing the business model. But as we said, we think we're just getting started on the value creation potential from these platforms and capabilities."
},
{
"speaker": "David Gibbs",
"content": "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."
},
{
"speaker": "",
"content": "So to the point of your question, the measures and the financial results from the rollout of these things, there are use cases all over the place for how this improves unit economics for franchisees, which ultimately is the heart of our business. The better their unit economics are, the more they build, the more they can afford to offer the right prices and value to customers and so on."
},
{
"speaker": "Operator",
"content": "The next question goes to Dennis Geiger of UBS."
},
{
"speaker": "Dennis Geiger",
"content": "Specific to the U.S., I'm wondering if you could speak a bit more to how you think about the trajectory of the brands with some of those tougher comparisons and the weather headwinds behind you, even if it's at sort of a higher level. And sort of maybe how do you think about how the brands are positioned in the U.S. in a seemingly difficult environment and whether there's sort of any notable strategy shifts that you guys contemplate in an environment like this, be it on value or otherwise?"
},
{
"speaker": "David Gibbs",
"content": "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."
},
{
"speaker": "",
"content": "And we think Taco Bell is incredibly well positioned for what I would describe as a more normal consumer environment today. Customers care more about value in the U.S.. Taco Bell, we know from the industry data that value is more important and that others are struggling with value and that Taco Bell is a value leader. You're seeing some low-income consumers fall off in the industry. We're not seeing that at Taco Bell. So a really favorable setup for Taco Bell, which you probably can say about any environment that they operate in given the strength of the brand."
},
{
"speaker": "",
"content": "And for Pizza Hut, obviously, the lapse in the quarter were unusually large. We always intend to lap anything with positive sales. We didn't do that at Pizza Hut U.S. But we are positive on a 2-year basis and we actually did see an acceleration of Pizza Hut's 2-year trends in Q1 versus Q4. I'm excited about the calendar that Pizza Hut has for the balance of the year as well in the U.S."
},
{
"speaker": "",
"content": "For KFC, it's a different story. The KFC brand in the U.S. has been struggling. And I think we're excited about some of the work that's going on behind the scenes to really boldly reset the brand in the U.S. We have a great playbook for KFC, which is our global business, our international business [ is on fire ], as I talked about before, the underlying business. We know how to bring that brand to life to connect with consumers around the world, and we have to do a better job of that in the U.S. It's a small part of our operating profit. Obviously, it doesn't really move the needle in the Yum! growth equation, but it is something that's a high priority for us as we move forward."
},
{
"speaker": "Operator",
"content": "The next question goes to Sara Senatore of Bank of America."
},
{
"speaker": "Sara Senatore",
"content": "First, a quick follow-up and then a question. Just about the impact from the Middle East, you said it was dissipating. I was just curious if you're doing anything specific to do that like brand marketing, that type of thing, or if it's just a matter of time?"
},
{
"speaker": "",
"content": "The question is about unit growth over time and sort of how that translates into system-wide sales maybe this year and beyond. As some of these AUVs are coming in lower as you think about your long-term algorithm, how should we think about that either this year kind of hitting the long-term algorithm from a top line perspective or over time?"
},
{
"speaker": "David Gibbs",
"content": "Sure. Thank you, Sara. The first part of your question, no, I don't think we're doing anything special. We've obviously had a lot of experience in the past being -- with the global footprint we have of dealing with different issues around the world, and we have a sense for how these things recover. But everyone is different and time is usually the answer to most of those problems."
},
{
"speaker": "",
"content": "As far as unit growth goes, yes, it is true that a lot of times when we're building, we're building particularly with our footprint and our emphasis on development. We're building in emerging markets which tend to have lower average unit volumes. That's how we built the powerhouse business in China back in the day and it's how we're building out markets like India, which tend to have lower volumes."
},
{
"speaker": "",
"content": "But we're also excited about a lot of the development agreements and new franchise partners that we're getting in Western Europe, for example, and some other markets around the world, which are much higher volume markets. And I think it will always be a mix and it will probably always tend to be lower volume than our typical average volume. And that's fine because these are markets that tend to start out with lower volumes and grow faster than a traditional market, and we've seen that all around the world over the last few decades as Yum! has built out its footprint."
},
{
"speaker": "Operator",
"content": "The next question goes to David Tarantino of Baird."
},
{
"speaker": "David Tarantino",
"content": "My question is on your results in the context of the sales performance. I think you mentioned that the operating profit in Q1 was slightly better than your expectations. I was curious to know how the sales are progressing relative to the expectations you might have had when you gave the guidance originally. And then in particular, I guess, was Q1 about what you expected, better than what you expected?"
},
{
"speaker": "",
"content": "And then secondly, David, if you could give us some sense of whether you have line of sight to global comps performance turning positive either in the second quarter or in the second half of the year?"
},
{
"speaker": "David Gibbs",
"content": "Thanks, David. Obviously, we didn't anticipate the weather impacts in the U.S., for example, in Q1. So it generally was in line with what we expected, perhaps just a tad weaker. But to the point of your question, as we go into Q2, as I mentioned earlier, the Taco Bell business is picking up strength. We are generally on track with our projections for the year, which is why we feel comfortable with our operating profit commitment and the long-term algorithm. But it is going to be a challenging year, and we have a great team out there tackling the challenges. And in any one of these challenging years, it's always an opportunity to grab market share as well. We're doing that through development with the pace of development that you're seeing."
},
{
"speaker": "",
"content": "And I'll just close with a few comments about the business. We talk about this a lot, but I think this was a quarter that really demonstrated how resilient this business is and how we can navigate just about anything thrown our way. The fact that we're sitting here in this first quarter in this choppy environment and we're able to put up 6% core operating profit growth and reconfirm that 8% plus target, I think, is a testament to the levers that we have to pull and the talent we have around the world."
},
{
"speaker": "",
"content": "Our twin growth engines which are 80% plus of our operating profit, Taco Bell U.S. and KFC International, their underlying strength of their business is obvious when you look at the 10% unit growth at KFC or you look at Taco Bell's performance with low-income consumers in a value environment and the acceleration we're seeing in 2Q. Our development machine, we actually just put up the second highest quarter for gross development in Yum's! history, obviously on track to meet or exceed that 5% development target."
},
{
"speaker": "",
"content": "And then very exciting, the digital inflection point. Passing 50% digital is something I don't think people thought was possible just a few years ago this quickly. It's a real testament to the quality of the teams that we put together. And as you can see from our prepared remarks, we are not at all resting on that as a key accomplishment as we lean in on things like AI and the use of our data to separate ourselves from the rest of the industry."
},
{
"speaker": "",
"content": "I'll leave you with one final fact which I heard just the other day which really goes to the core of what we are and the strength of our business. Since January of 2021, 25% of all the Yum! units in the world have been built. That's how new our asset base is. That's how fast we're developing. Think about the impact that, that has on the consumer in terms of how fresh and modern our brands are. Since January '21, 25% of our store base has been built. We don't see that slowing down at any time soon. And in a choppy environment this year, we're very confident that we can get through it, strengthen our business and come out of it delivering that 8% core operating profit growth."
},
{
"speaker": "",
"content": "Thank you for your time today."
},
{
"speaker": "Operator",
"content": "Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines."
}
] |
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