Yum! Brands Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2022

Key Takeaways

  • Q1 system sales grew 8%, driven by 6% unit growth and 3% same-store sales, with a Q1 record of 997 gross unit openings and a digital sales milestone of $6 billion at over 40% mix.
  • Operations in Russia were suspended and ownership is being transferred to local operators, with profits redirected to humanitarian aid, reducing Q1 operating profit by 1 point and expected to cut full-year core operating profit by ~3%.
  • Pizza Hut U.S. comps fell 6% as delivery capacity was constrained by driver shortages, prompting integration of an outsourced delivery-as-a-service model and expansion into aggregator marketplaces to meet demand.
  • Excluding China, global same-store sales rose 6% (emerging markets +18%), and strategic pricing plus scale helped maintain Taco Bell’s company-owned restaurant margins at ~22%, in line with Q1 2019 levels.
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Earnings Conference Call
Yum! Brands Q1 2022
00:00 / 00:00

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Operator

Welcome to the Q1 2022 Yum! Brands Earnings Conference Call. My name is Ruby, and I will be your moderator for today's call. If you would like to ask a question during the presentation, please press star followed by one on your telephone keypad. I will now hand it over to our host, Jodi Dyer, VP of Investor Relations, to begin.

Jodi Dyer
Jodi Dyer
VP of Investor Relations at Yum! Brands

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, I would like to remind you that this Conference 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 announcement 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.

Jodi Dyer
Jodi Dyer
VP of Investor Relations at Yum! Brands

In addition, please refer to our earnings releases and relevant sections of our filings with the SEC to find disclosures and definitions of non-GAAP financial measures and other metrics that may be used in today's call, as well as reconciliations of non-GAAP financial measures. Please note that during today's call, all system sales and operating profit results exclude the impact of foreign currency. Additionally, as it relates to our Russia business, our operating results for Q1 continue to reflect revenues and expenses-related to Russia within their historical financial statement line items and operating segments. However, we have reclassed net operating profit attributable to Russia for the month of March that had not yet been redirected to humanitarian efforts as of the end of the quarter from the operating segments in which it was earned to our corporate and unallocated segment.

Jodi Dyer
Jodi Dyer
VP of Investor Relations at Yum! Brands

Such operating profit has been reflected within other income expense and reflected as a special item. David and Chris will provide additional context in their prepared remarks. For more information on our reporting calendar for each market, please visit the financial report section of our website. We are broadcasting this Conference Call via our website. This call is also being recorded and will be available for playback. Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording. We would like to make you aware of upcoming Yum investor events in the following. Disclosures pertaining to outstanding debt and our restricted group capital structure will be provided at the time of our Form 10-Q filing. Q2 earnings will be released on August 3, 2022, with a Conference Call on the same day.

Jodi Dyer
Jodi Dyer
VP of Investor Relations at Yum! Brands

Finally, we will be hosting an in-person Yum! Brands Investor Day on Tuesday, December 13, 2022, at the New York Stock Exchange. Stay tuned for more details. Now, I'd like to turn the call over to Mr. David Gibbs.

David Gibbs
David Gibbs
CEO at Yum! Brands

Thank you, Jodi, and good morning, everyone. Before I go over our Q1 results, I'd like to begin by sharing an update on our business in Russia and Ukraine. As a company that puts people first in every decision, I'm incredibly proud that we have made the safety and well-being of all those impacted by the tragedy in Ukraine a top priority. I want to personally thank our many dedicated team members and franchisees working hard to navigate through this deadly conflict and manage our business in the most complex and challenging geopolitical environment in recent history. I'm proud of how our people in the surrounding regions have banded together and are doing everything possible to support impacted Ukrainian refugees, team members, and franchisees, some of whom have overcome incredible challenges and have reopened a number of stores to serve food in communities where it is safe.

David Gibbs
David Gibbs
CEO at Yum! Brands

Additionally, the Yum! Brands Foundation made a donation to the Red Cross to support those affected by the crisis. We activated the Yum! Brands Disaster Relief Fund to support Ukrainian franchise employees and are matching employee donations to organizations providing relief in Ukraine, including UNICEF, the Red Cross, the World Food Programme, and the International Rescue Committee. We previously announced the suspension of all investment and restaurant development efforts in Russia, as well as operations of company-owned KFC restaurants, and that we are finalizing an agreement with our Pizza Hut master franchisee to suspend all restaurant operations. In addition to these actions, we have begun a process aimed at transferring ownership to local operators while, in the interim, we continue to redirect any profits from Russia operations to humanitarian aid.

David Gibbs
David Gibbs
CEO at Yum! Brands

This is not a decision we take lightly, and I know that it will be a complicated process to execute these transactions. We will update you on this process during our Q2 earnings call. Chris will provide more details around the financial impact from Russia on the quarter. I'll now discuss our Q1 results, which illustrate the resiliency of our highly franchised, diversified growth model. Our Q1 system sales growth of 8%, driven by both unit development and same-store sales growth, is a testament to our iconic brands and the unmatched operating capabilities of our world-class franchise partners. We set a Q1 development record, opening nearly 1,000 growth units supported by positive unit growth at each of our brands.

David Gibbs
David Gibbs
CEO at Yum! Brands

Our continued same-store sales momentum was fueled by our brands executing our Recipe for Growth strategy by providing relevant value, access via new channels, distinctive products, and a strong brand voice, all supported by our digital and delivery capabilities. Our digital channels continue to accelerate with digital sales of approximately $6 billion. A new Q1 record reflecting an increase of 15% year-over-year. Importantly, we set a new digital mix record, now exceeding 40%. In this complex and highly inflationary operating environment, we and our franchisees remain focused on maintaining long-term profitability by leveraging our scale and strategic pricing actions while still offering our customers convenience and value. The many competitive advantages of our unrivaled talent, our sophisticated franchise system, and the power of our business model give me great confidence that we are well-prepared to navigate these complexities and deliver robust global growth.

David Gibbs
David Gibbs
CEO at Yum! Brands

Let me share a few global trends from the quarter. As Yum China shared on its Q1 earnings call last night, COVID-related lockdowns impacted restaurant operations and depressed sales in that market, temporarily delaying an eventual recovery. However, our results outside of China remain strong. In fact, excluding China, both our KFC division and Pizza Hut International same-store sales were up 10% which would result in consolidated Yum same-store sales, excluding China, of 6% for the quarter. We're pleased with the continued momentum in our developed markets as they lap strong results from last year, and we're excited about the continued resurgence of emerging markets with same-store sales, excluding China, of positive 18% for the quarter. We continue to be encouraged by the global consumer recovery underpinned by returning consumer mobility, creating a tailwind for our on-premise dining while we sustain our off-premise business.

David Gibbs
David Gibbs
CEO at Yum! Brands

Next, I'll discuss two of the four Recipe for Growth drivers, our Relevant, Easy, and Distinctive brands, or RED for short, and our unrivaled culture and talent. Then I'll discuss the progress we've made on our Recipe for Good. Turning to our first growth pillar, our Relevant, Easy, and Distinctive brands. Starting with the KFC division, which represents 51% of our operating profit, Q1 system sales grew 9%, driven by 8% unit growth and 3% same-store sales growth. To illustrate the strength of the KFC brand around the world, I thought I'd highlight a few markets that showed meaningful improvement in the quarter, specifically the Middle East, Latin America, and Africa. Our Middle East market delivered 40% system sales growth, fueled by robust transaction growth.

David Gibbs
David Gibbs
CEO at Yum! Brands

Our marketing teams led with a healthy balance of new products with the launch of the Messy Burger, as well as innovative, value-focused, flavory items such as the Twister Blade. These items drove both value perception and new customer acquisition. Additionally, the teams focused on meeting the needs of our customers through digital and off-premise channel growth while the dine-in business bounces back, fueled our strong results. Latin America is another standout market. This quarter system sales grew 34%, thanks to our team hitting on all fronts. All countries in the market deployed a balanced marketing calendar focused on value to drive velocity and transactions, while taste campaigns continued to build brand strength. This came to life for consumers in January with the Genius Menu value ladder that's helping recover the individual occasion.

David Gibbs
David Gibbs
CEO at Yum! Brands

In March, the Latin American market launched the Kentucky Fried Chicken sandwich for the first time, which drove over 10% growth in the sandwich category. Another market worth highlighting is our Africa business, which has been incredibly resilient as system sales grew 25%. Results were fueled by a continued traffic recovery, leading to transaction growth ahead of pre-COVID levels, and seeing our value-driven strategy that offers successful price points resonated well with customers. Finally, in the U.S., our KFC team is working hard to maximize convenience for the customer and focusing marketing efforts on creating greater awareness of our off-premise channels, including quick pickup services and our white label delivery offering. The incremental sales layers we've built over the past two years, including our digital ordering channels and the chicken sandwich platform, contributed to top-line growth this quarter in the face of a difficult operating environment.

David Gibbs
David Gibbs
CEO at Yum! Brands

Additionally, we offered Beyond Fried Chicken in the quarter, which elevated the brand and boosted relevance, resulting in more media impressions than any other product launch in the brand's history. A consistent theme across each of these four markets is the continued growth of digital transactions and the ability to execute an omnichannel strategy. Moving to the Taco Bell division, which represents 32% of our operating profit, Q1 system sales grew 8%, driven by 5% unit growth and 5% same-store sales growth. Taco Bell U.S. system sales grew 7%, driven by 2% unit growth and 5% same-store sales growth. I thought I'd start by celebrating Taco Bell's sixtieth anniversary as a brand.

David Gibbs
David Gibbs
CEO at Yum! Brands

Given the brand's role as a culture leader in the industry, it's easy to forget its experience and heritage, all of which makes us even more confident in the brand's ability to navigate any economic environment. Taco Bell is executing on its strategy to inspire and enable the world to Live Más by remaining relevant, easy, and distinctive to its customers. On the relevance front, Taco Bell continued to champion customer value with new offerings to meet all occasions, including the introduction of $2 burritos on the new Cravings Value Menu, adding to Taco Bell's existing $1 menu offerings. The combination of Taco Bell's new Cravings Value Menu with its box and combo offerings position Taco Bell well to serve the needs of all customers. Beyond value, Taco Bell was actively marketing craveable distinctive foods from its limited-time Crispy Chicken Wings to the return of our fan favorite Nacho Fries.

David Gibbs
David Gibbs
CEO at Yum! Brands

Additionally, the return to the Super Bowl with Doja Cat marked a distinctive cultural moment in the quarter. We're building on this cultural moment with the long anticipated and much celebrated upcoming return of the Mexican Pizza, which Doja Cat announced in April. Taco Bell International system sales grew 37%, driven by 26% unit growth and 12% same-store sales growth. We continue to build brand momentum in multiple markets, including the U.K., Spain, and India. Our new strategy to rescale in a few key markets has driven brand awareness, thereby improving new unit returns that lead to accelerated growth. Next, the Pizza Hut division, which accounts for 18% of our operating profit, saw Q1 system sales grow 3%, driven by 5% unit growth and flat same-store sales growth.

David Gibbs
David Gibbs
CEO at Yum! Brands

At Pizza Hut International, which represents 11% of our operating profit, system sales grew 10%, underpinned by 7% unit growth and 5% same-store sales growth. We opened 283 growth units, setting a Q1 record. With further easing in COVID restrictions, we saw strong contributions from India and Latin America, where system sales were up 44% and 18% respectively. At Pizza Hut U.S., which represents 7% of our operating profit, system sales declined 6% for the quarter, attributable to a 6% decline in same-store sales and flat unit growth. While consumer demand remains strong, sales softness in the quarter stems from our delivery channel where capacity constraints limited our ability to meet demand. This was driven by staffing challenges, mainly from delivery driver shortages that have been felt across the industry.

David Gibbs
David Gibbs
CEO at Yum! Brands

The team is prioritizing restaurant operations, including a focus on improving staffing levels, restoring operating hours, increasing online ordering availability, and more effectively leveraging the use of our overflow call centers. Additionally, in early Q2, we completed the integration of delivery as a service into our point of sale system. This is leading to accelerated system adoption, allowing us to leverage third-party aggregators to augment our own delivery drivers. Another action item we're taking is expanding customer access to the Pizza Hut brand via aggregator marketplaces. We are excited about the potential incremental growth from aggregator marketplaces based on outperformance we're seeing from existing franchisees using this channel. Lastly, at The Habit Burger Grill, Q1 system sales grew 17%, driven by 13% unit growth and 3% same-store sales growth.

David Gibbs
David Gibbs
CEO at Yum! Brands

To streamline restaurant operations for team members this quarter, we promoted operationally easy to execute customer favorites such as our Patty Melt and the Santa Barbara Char. We continued to lean into digital-only promotions and saw a strong response to our delivery and app-only campaigns in the quarter that ultimately drove an increase in app downloads and active app users. Even as consumer mobility improved in Q1, our digital sales across multiple channels increased sequentially, continuing to demonstrate the stickiness of these ordering options. Moving on to our unrivaled culture and talent growth driver. We kicked off the celebration of our 25th year as a publicly traded company with several powerful forums that galvanized our top talent around engagement and development. For the first time in 5-years, we brought our top 250 leaders from around the world together for our Global Leadership Summit.

David Gibbs
David Gibbs
CEO at Yum! Brands

Our technology leaders at the summit made up the largest functional group, which speaks to the investments we've made in differentiated technology capabilities and growth-oriented functions. We also showcased the progress our brands have made putting our Recipe for Good priorities at the center of our future growth, not only with less carbon and less packaging and waste, but also by making equity and inclusion come alive across every aspect of our business, from our talent to our brand marketing to our suppliers and franchisees. Additionally, we were proud to take many of our aspiring leaders to the Women's Foodservice Forum, where our Chief Operating Officer and Chief People Officer, Tracy Skeans, serves as chair.

David Gibbs
David Gibbs
CEO at Yum! Brands

It was wonderful to see Yum so prominently represented in a forum dedicated to growing women in our industry, something truly important to us as we're increasing the number of women in senior leadership globally and are on track to achieve gender parity in leadership by 2025. Finally, a group of our diverse leaders gathered in Washington, D.C., to discuss how we inspire and advance equity, inclusion and belonging across all levels of our organization. When it comes to our Recipe for Good, we invest in critical work that's focused on our three priority areas of people, food and planet. Just last month, and as part of our larger climate strategy, Yum joined the Supplier Leadership on Climate Transition, which was created to accelerate climate action throughout supply chains.

David Gibbs
David Gibbs
CEO at Yum! Brands

Our climate work is starting to take shape in markets such as KFC UK, where they have partnered with the University of Liverpool to develop a roadmap to achieve net zero carbon and zero waste. To wrap up, this continues to be an incredibly challenging operating environment, but my confidence in our future remains high given the resilience of our iconic brands across our global diversified portfolio. Our unmatched global scale provides us unique competitive advantages, including our sophisticated supply chains with cross-brand purchasing power, strong marketing and consumer insights, expanding digital and technology capabilities, and our capable, committed, and well-capitalized franchisees that are willing to invest in the long-term growth of the business. This quarter's results continue to demonstrate the power and sustainability of our business model while we continue to deliver lasting value for our stakeholders for years to come. With that, Chris, over to you.

Chris Turner
Chris Turner
CFO at Yum! Brands

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our bold restaurant development and unmatched operating capability growth drivers, and our solid balance sheet and liquidity position. I'll start by discussing our financial results. Our Q1 system sales grew 8%, driven by 6% unit growth and 3% same-store sales growth, reflecting our continued global momentum. During the quarter, we opened 997 gross units, a Q1 record for Yum. Core operating profit decreased 5% for the quarter, including a negative impact from Russia of 1%. Ex special general and administrative expenses were $252 million, tracking in line with our expectations for $1.1 billion of G&A expense for fiscal 2022 and a return to our normal quarterly cadence.

Chris Turner
Chris Turner
CFO at Yum! Brands

Despite inflationary headwinds, we maintained company-owned restaurant margins of approximately 22% at Taco Bell, in line with Q1 2019 pre-COVID margins. Finally, EPS, excluding special items, was $1.05, representing a 1% decrease year-over-year. Next, I'll address the impact to our Q1 results from the Russia conflict in Ukraine. We previously announced the suspension of all investment and restaurant development efforts in Russia, as well as operations of company-owned KFC restaurants, and that we are finalizing an agreement with our Pizza Hut master franchisee to suspend all restaurant operations in that brand. In addition to these actions, we pledge to redirect profits from operations in Russia to humanitarian aid. Our core operating profits in Russia declined versus Q1 of last year, negatively impacting our Yum core operating profit growth by 1 percentage point.

Chris Turner
Chris Turner
CFO at Yum! Brands

Finally, as David previously shared, we have begun a process aimed at transferring ownership to local operators. We will plan to provide additional updates on the process on our next earnings call. Given the rapidly evolving operating environment, we wanted to provide our latest thoughts on full-year results and the shape of the year. We remain confident in the strength of our business and our ability to achieve our long-term growth algorithm in future years. In 2022, the underlying momentum of the business gives us confidence that we can still deliver on the same store sales, unit growth, and system sales aspects of our long-term growth algorithm. Were it not for the loss of Russia profits, we would deliver on all elements of our long-term growth algorithm in 2022.

Chris Turner
Chris Turner
CFO at Yum! Brands

However, losing 3% of full-year core operating profit from the exclusion of Russia profits puts us outside of our high-single-digit core operating profit range this year with our current forecast closer to mid-single-digit core operating profit growth. With strength in many key markets, continued emerging market recovery, and strong development momentum, our teams will continue to strive to over-deliver against our current forecast. We'll keep you updated as the year progresses. As a reminder, given the shape of our anticipated G&A spend in 2022 in comparison to 2021, we expect our G&A expense to remain a headwind to Q2 core operating profit growth and a tailwind to second half core operating profit growth. Additionally, we expect continued softness in China and a full quarter impact from the exclusion of Russia profits.

Chris Turner
Chris Turner
CFO at Yum! Brands

Therefore, we now expect Q2 core operating profit trends to be similar to Q1, and we remain on track with our prior expectations for high teens% core operating profit growth in the second half of the year. While our system sales and operating profit results shared during today's call exclude the impact of foreign currency, we wanted to provide a brief update on the impact in the quarter and the anticipated impact on both our Q2 and full-year results. For Q1, our reported operating profit was unfavorably impacted by $14 million due to foreign currency translation. Based on current exchange rates, we expect FX to reduce Q2 reported operating profit by approximately $12-$14 million and reflect a headwind to full- year reported operating profit of approximately $30-$45 million.

Chris Turner
Chris Turner
CFO at Yum! Brands

This is directional guidance as rates will likely change as we move through the year. Moving on to our bold restaurant development growth driver, I'm excited to share that we had another quarter with each of our brands reporting strong positive unit growth. During the quarter, we opened 997 gross units, resulting in 628 net new units. A Q1 development record for Yum! contributing to 6% unit growth over the last 12 months. We wouldn't be able to achieve these record-breaking results without broad-based contributions from multiple markets across each of our brands. In fact, we had over 500 gross units and 261 net new units opened outside of China, contributing to 5% unit growth in the rest of world year-over-year.

Chris Turner
Chris Turner
CFO at Yum! Brands

Both KFC division and Pizza Hut International delivered another exceptional development quarter with 587 and 283 gross units opened respectively. While Yum China continues to be our lead developer, there were significant contributions from each of these brands in India, Asia, the Middle East, and Latin America. Taco Bell remains on track for another record development year with growth in next-gen assets in the U.S. and additional markets reaching scale internationally. On that front, we're excited to share that Yum China has committed to expanding the Taco Bell brand, which will allow even more people to Live Más as we build our brand identity globally and grow our footprint in that market. To that end, we now expect to have 3 more markets cross the critically important scale threshold of 100 units by the end of 2022.

Chris Turner
Chris Turner
CFO at Yum! Brands

Joining Spain, which reached that milestone in 2021. The global development landscape is increasingly complex, but the sophistication, scale, and capabilities of our teams and franchisees provide competitive advantages that allowed us to deliver yet another quarter of record unit openings. The visibility into our development pipeline remains strong. Now, I'll discuss our unmatched operating capability and the three key elements we're leaning into easy experiences, easy operations, and easy insights. Before I provide an update across our easy pillars, I want to comment briefly on our global supply chain. Our supply chain teams continue doing an amazing job building supply chain contingencies and acting as needed to secure product availability, including restaurant equipment, which is necessary for new store openings.

Chris Turner
Chris Turner
CFO at Yum! Brands

Additionally, I'm proud of how our sourcing teams are leveraging our scale and cross-brand purchasing power to help our franchisees and equity stores manage costs in this highly inflationary environment as an important lever in maintaining long-term profitability. This scale, combined with our operating experience and learnings from exposure to over 155 markets around the world, create a unique competitive advantage for us as we navigate these inflationary pressures. Starting with easy experiences, with continued reopening trends in markets around the globe, a frictionless experience remains front and center for the consumer. With that in mind, we are constantly adding new, convenient ways for our customers to access our brands. KFC U.S. and The Habit Burger Grill have made digital ordering even easier. Customers can now order via the app and pick up their food from a specific cubby or shelf within the restaurant.

Chris Turner
Chris Turner
CFO at Yum! Brands

This enables a quicker and more seamless experience that eliminates the need to wait in line at the counter or in the drive-thru. Quick pickup is fully deployed across the KFC U.S. system, and roughly a third of The Habit stores currently have dedicated pickup shelves with plans to expand more broadly in the coming months. In addition, Taco Bell U.S. recently launched a similar program in their equity stores and will continue to deploy across their systems more broadly in the coming quarters. Both delivery and early tests of quick pickup continue to free up drive-thru capacity for the Taco Bell system, which helps fuel their ninth consecutive quarter of average drive-thru times under four minutes with a sequential improvement from their Q4 drive-thru speed.

Chris Turner
Chris Turner
CFO at Yum! Brands

Internationally, we have exciting projects in early stages, including our KFC Australia business, which is piloting a drone delivery program that gets our finger-licking good products to our customer's home or office in less than 15 minutes on average from when it's ordered. Next, I'll move on to easy operations, in which we are focused on streamlining operations for our team members and franchisees. We are installing a new kitchen display system and smart hub and leveraging our cloud-based point of sale system in our Taco Bell locations with the goal of modernizing the employee experience and providing more digital capabilities within our restaurants. These systems separate out delivery orders from standard drive-thru orders, allowing for improved visibility and execution in the restaurant by our team members.

Chris Turner
Chris Turner
CFO at Yum! Brands

At KFC U.S., we're improving back of house operations by expanding our mobile manager, a back of house suite of applications which simplifies ordering, inventory management, and digital order fulfillment, enabling our team members to spend more time focusing on the customer experience. Pizza Hut continues to make progress putting technology in the hands of its team members through continued global expansion of Dragontail, HutBot, and the 360 Coach platforms. Given the driver staffing challenges we're experiencing in the Pizza Hut U.S. business, we're piloting the Dragontail platform in over 100 of our U.S. stores to improve the efficiency of our delivery network. We're excited by the early results, and the platform is working as we hoped, given the outstanding performance we've seen in other markets around the world.

Chris Turner
Chris Turner
CFO at Yum! Brands

We're in conversations with our franchisees to expand this cutting-edge platform across the U.S. system. Third, I'll discuss easy insights, in which we focus on using data and analytics to drive more effective marketing and leverage our insights to enhance the customer and team member experience. At Taco Bell U.S., we continue to experiment with new and innovative ways to engage with our consumers through LTO programs such as the Taco Lover's Pass, which helped fuel growth in loyalty memberships during the quarter and which drove customer frequency. Kvantum continues to scale its media mix marketing tool, which was recently used in several Pizza Hut International markets to drive incremental sales for the more efficient use of marketing spend. Additionally, we continue to build targeted artificial intelligence and machine learning-based tools, including an exciting new pricing tool that is being piloted in select international markets.

Chris Turner
Chris Turner
CFO at Yum! Brands

Next, I'll provide an update on our strong balance sheet and liquidity position. We ended the quarter with cash and cash equivalents of $365 million, excluding restricted cash. On April 1, we called our $600 million, 7.75% YBI bonds due in 2025. The repayment was funded by the issuance of a new $1 billion, 5.375% YBI bond due in 2032. We were especially pleased with the strong demand and execution in light of the rate environment and volatility in the financial markets. With the recent bond offering, which closed subsequent to the quarter, our consolidated net leverage is roughly in line with our target of 5x.

Chris Turner
Chris Turner
CFO at Yum! Brands

Our capital priorities remain unchanged. Invest in the business, maintain a healthy balance sheet, pay a competitive dividend, and return the remaining excess cash to shareholders via share repurchases. Capital expenditures, net of refranchising proceeds during the quarter were $18 million. We continue to expect net capital expenditures of approximately $250 million for the full-year, reflecting roughly $100 million in refranchising proceeds and up to $350 million of gross CapEx. With respect to our share buyback program, during the quarter, we repurchased 3.4 million shares at an average share price of $121 per share, totaling approximately $407 million. In closing, I'm pleased with the results of the quarter. We opened a record number of units for Q1, driving impressive system sales growth.

Chris Turner
Chris Turner
CFO at Yum! Brands

We remain committed to advancing our digital and technology capabilities, leading to enhancements in both the team member and customer experience. I'm confident in our teams and franchisees' ability to win in a dynamic and complex global landscape. With that, operator, we are ready to take any questions.

Operator

If you would like to ask a question, please press star followed by one on your telephone keypad now. When preparing to ask your question, please ensure you are unmuted locally. If you change your mind, please press star followed by two. Our first question is from Dennis Geiger of UBS. Your line is now open. Please go ahead.

Dennis Geiger
Dennis Geiger
Analyst at UBS

Great. Thanks for the question, and good morning. I was wondering if you could talk a little bit more about the brands in the U.S., how they're positioned right now, and I guess really what you're seeing from the customer, in recent months. Have behaviors changed at all? Anything that you would call out there. I guess most importantly, just kinda looking ahead, David, I think you spoke to the resiliency and how Taco Bell and some of the brands can navigate a tough consumer spending environment. Just wondering if you could speak a little bit more to that, please. Thank you.

Chris Turner
Chris Turner
CFO at Yum! Brands

Yeah, sure. Thanks for the question, Dennis. Just as far as the consumer, you know, I would say that, U.S. demand is generally strong, but this is a really complex environment. I know a lot of people have talked about the K-shaped recovery and the, you know, bifurcated, you know, with higher income consumers, in better shape than lower income. I think that's true, but I think that's probably a little bit of an oversimplification. I don't know in my career if we've seen a more complex environment to analyze consumer behavior than what we're dealing with right now.

Chris Turner
Chris Turner
CFO at Yum! Brands

You know, from an economic standpoint, you know, you've got inflation, rising wages, you've got the funkiness of the stimulus lap that we're lapping from last year, but you've also got all these societal issues, you know, like mobility coming out of COVID, you know, consumer reaction to war in Eastern Europe, working from home, changing consumer patterns. All of this makes for a pretty complex environment to figure out how to analyze it and market to consumers. That's the great part about Yum.

Chris Turner
Chris Turner
CFO at Yum! Brands

We've got the scale and the talent to do that better than we think anybody else in the industry and navigate that complexity, you know, with our internal divisions like Collider Lab, which is an expert on consumer behavior, Kvantum, helping us figure out how to navigate the media landscape to market to those consumers, and all of our marketing and talent, marketing talent and leaders in the U.S. and around the world. Complex environment, but as usual, convenience and value matters in this environment, and we believe we're leaders across our brands in that regard. You're seeing that result really in all the brands in Q1 in the U.S. The challenge obviously at Pizza Hut with less of sales performance is simply just due to demand.

Chris Turner
Chris Turner
CFO at Yum! Brands

Just the demand is there, but simply due to our ability to meet that demand with drivers as has been documented by others. Generally, as you mentioned, resiliency is a key feature of our brands, and going forward, we actually feel, you know, really good about our ability to navigate this environment and continue to prosper.

Dennis Geiger
Dennis Geiger
Analyst at UBS

Thank you very much.

Operator

Our next question is from John Glass of Morgan Stanley. Your line is now open. Please go ahead.

John Glass
John Glass
Analyst at Morgan Stanley

Thanks. Good morning. Chris, just inside your new mid-single-digit or, you know, core operating profit ex with the impact of Russia, what are you assuming China does in that? I suspect that's another, you know, pivotal piece. What gives you confidence in that re-acceleration in the back half? I understand, you know, comparisons are easier. Just when you look at that guidance, you know, 6% unit growth is above that long-term reset target. Is that a realistic view for this year, or was Q1 just unusually good and that's not necessarily the right run rate? Thanks.

David Gibbs
David Gibbs
CEO at Yum! Brands

Yeah. Thanks, John. On the profit side, you know, we feel really good with the profit plan for the year. We laid out the shape on our last call. We said the first half was gonna be, you know, roughly flat. Of course, we now have a Russia impact. You know, that was 1 point in Q1. Of course, if you think about the lost profit growth in Russia, that actually gets you closer to a couple points. As you mentioned, you know, the China impact, as you heard on their call, the business there is softer than expected, so that's had a bit of an impact. We expect that, you know, going into Q2 as well. You know, Q2 is gonna land, you know, about where Q1 is. Those are the two, you know, primary drivers.

John Glass
John Glass
Analyst at Morgan Stanley

Of course, when we think about the full-year, we still think Russia is the one driver that takes us off of our algorithm from a profit standpoint for the year. Of course, we're gonna work hard to try to over-deliver against that plan. In general, we feel you know, really good about the profit plan you know, with a little bit of noise there on those two factors. In terms of development, we feel great about the pipeline. Our Q1 was strong, but the pipeline looking to the rest of the year remains strong as well. Of course, it's our job every day to come in and find ways to over-deliver against that 4%-5% unit guidance.

John Glass
John Glass
Analyst at Morgan Stanley

Of course, you know, keep in mind, we had 100 net new units from Russia last year. Even without the 100 net new units, we still feel good about delivering on that part of the algorithm. Thank you.

Operator

Our next question is from Jon Tower of Citi. Your line is now open. Please go ahead.

Jon Tower
Jon Tower
Analyst at Citi

Great. Thanks for taking the questions. Just two real quick from me. Just going back to that unit growth piece specifically, can you talk about perhaps how management incentives across the company may have been realigned in recent years to kinda focus more on this growth aspect of the business, unit growth side specifically, across the brands? Then secondarily, drilling down specifically into Pizza Hut U.S. in the move to 3PD, using it as a sourcing and fulfillment platform, can you comment on the decision to move that way? Specifically, why do the fulfillment side using 3PD and potentially giving up that competitive advantage that the brand holds from a delivery standpoint? Thank you.

David Gibbs
David Gibbs
CEO at Yum! Brands

Thanks, John. I'll take the first question. Chris will comment on Pizza Hut. As far as unit development, obviously we're very proud of the progress that we've made. Yes, we have actually introduced some new incentives company-wide around development. We thought it was important to just unite you know ourselves and our franchise partners to take advantage of, frankly, an environment that's really favorable to us. Our brands have gotten stronger over the last two years in general. Our business model is stronger, and there are really great opportunities to expand our footprint, you know, in a lot of economies around the world where, you know, there have been some you know discounts to available real estate.

David Gibbs
David Gibbs
CEO at Yum! Brands

You're seeing all of that come together through the use of incentives with our team and with, in some cases, in franchise markets. That's all leading to an increase in the pace of development that we're proud of. As Chris mentioned, we have visibility into the pipeline and believe it will continue.

Chris Turner
Chris Turner
CFO at Yum! Brands

Yeah. Dave, on the second part around Pizza Hut U.S. and the shift to using third-party delivery, as David said earlier, you know, we still see strong demand in the Pizza Hut U.S. business, but it's primarily a challenge of being able to fulfill it with the labor challenges around drivers in particular. That's the most pronounced challenge that we have from a labor perspective in the U.S.

Chris Turner
Chris Turner
CFO at Yum! Brands

That's part of the driver for continuing to shift to additional modes of being able to deliver, and we're doing that by adding in both Delivery as a Service, which is basically, you know, still having sales through our website and apps, but then fulfillment leveraging those third-party drivers during peak periods when we need extra capacity and to help us, you know, address some of those hiring challenges for drivers. But as we mentioned, we're also, you know, working with the aggregator partners on the marketplaces. That's just part of our strategy for wanting to be ubiquitous, be everywhere that our company, our customers want to do business with us. And we're seeing in the early going on that, incremental growth from those channels.

Chris Turner
Chris Turner
CFO at Yum! Brands

In fact, we've got, you know, one of our leading, franchisees, who has already, moved onto those platforms and is running, you know, 4 points or so ahead of the system, which is primarily driven by the incremental customers that they're finding on those platforms. Of course, the way we negotiate, you know, the economics in those, deals, in the U.S., we, you know, really are indifferent in terms of where the sales fall. We ensure that our economics are roughly the same across channels. We wanna be there wherever our customers wanna do business with us.

John Glass
John Glass
Analyst at Morgan Stanley

Thank you.

Operator

Our next question is from David Palmer of Evercore ISI. Your line is now open. Please go ahead.

David Palmer
David Palmer
Senior Managing Director at Evercore ISI

Thanks. That was an interesting comment just right then. You said the franchisee was 4 points better than the average, so down low-single-digit as opposed to down 6%. Is that the type of thing you were seeing when they did that third-party collaboration?

David Gibbs
David Gibbs
CEO at Yum! Brands

Running, you know, 4 or 5 points ahead of the system, and the vast majority of that we attribute to the incremental customers that they're finding through the platform.

David Palmer
David Palmer
Senior Managing Director at Evercore ISI

Do you think that that's going to be, you know, the majority of the system will be doing something similar to that franchisee by the end of the year? I guess I'm wondering if, you know, this is a little crystal ball-ish, but do you think that the third-party delivery adoption will be fairly universal within the U.S., and do you anticipate on top of that, some sort of labor easing being a path forward here to flat to positive comps for the U.S.?

David Gibbs
David Gibbs
CEO at Yum! Brands

Well, you know, in terms of the strategy to address these challenges, you know, David Graves and Aaron Powell, who are doing a great job, you know, dealing with this very dynamic environment, those are a couple of key parts of their strategy for dealing with this. We'll be implementing the Delivery as a Service, as we mentioned, in the earlier comments over the next, you know, 2 to 3 quarters. Of course, you know, the franchisees each have a decision on, you know, how to work with aggregators, but we do that under our umbrella agreements. We expect that if those kinds of gains continue to show up in the results, obviously, I think, more and more are gonna be, you know, choosing to move in that direction.

David Gibbs
David Gibbs
CEO at Yum! Brands

The implementation, you know, will take a while, but it's certainly part of the strategy for dealing with this really dynamic environment.

David Palmer
David Palmer
Senior Managing Director at Evercore ISI

Just one last question is what is the sort of mix that you get, like that franchisee, for example, what sort of mix do they get from third party when they get that type of improvement? And I'll pass it on. Thank you.

David Gibbs
David Gibbs
CEO at Yum! Brands

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

David Palmer
David Palmer
Senior Managing Director at Evercore ISI

Thank you.

Operator

Our next question is from John Ivankoe of J.P. Morgan. Your line is now open. Please go ahead.

John Ivankoe
John Ivankoe
Analyst at J.P. Morgan

Hi. Thank you. I did want to revisit some of the comments on economics, which is, you know, clearly, I mean, these brands have been around long enough, you know, in the U.S. and globally that, I guess there are enough, you know, maybe previous experiences that we can maybe pick and choose from, you know, historically. You know, in environments where a consumer's costs have risen faster, you know, than their incomes, and obviously there are so many costs that are rising, you know, for the consumer, where does the consumer or where might the consumer typically cut back? Is it in visitation or is it in ticket? You know, I guess this is kind of the first point.

John Ivankoe
John Ivankoe
Analyst at J.P. Morgan

Secondly, if it is ticket, and when you guys look back, you know, 2022 versus 2019, how much of that average ticket gain do you think was actually frothy, the consumer that, you know, that maybe traded up, you know, or added on, or larger sizes what have you to unsustainable levels versus, you know, how much average ticket do you think, you know, may naturally come out of the business as the consumer still uses, you know, the QSR brands for all the obvious reasons, you know, but can just, you know, find back ways that you'd basically revert to the mean in terms of what they actually buy and how they use the various brands?

David Gibbs
David Gibbs
CEO at Yum! Brands

Yeah. Thanks for the question, John. You know, obviously on the ticket, I think the biggest driver of the ticket increase over the last few years has actually been party size, rather than premiumization, although they're both drivers. As we see, you know, mobility return, individual meals return, that could bring down ticket without necessarily implying consumers are trying to cut back on, you know, cost per eater. You know, as far as the consumer and how their behavior in this environment, you know, some of the other things to think about are, you know, the fast casual category has grown a lot.

John Glass
John Glass
Analyst at Morgan Stanley

We expect that, you know, if there's cutting back, that there'll be some trade down from fast casual back into QSR, which will be favorable for us, particularly, you know, Taco Bell, which I think is well-positioned to capture some of those visits. You know, it all comes back to this theme of the QSR industry is built on convenience and value. Convenience and value win in any environment, particularly when you couple it with our great brands and the innovative products that we're constantly introducing. You saw Taco Bell's performance in Q1 in the U.S., you know, +5%, one of the better numbers for, you know, the major QSR chains. You saw the growth that we're getting just with Taco Bell internationally.

John Glass
John Glass
Analyst at Morgan Stanley

I think we feel like we've got momentum, and this environment is not going to, you know, get us off of it, but we're gonna have to do what we always do, which is continue to pivot and evolve our offerings to meet consumers' needs. Taco Bell is a great example. 70% of our U.S. profit, they've been leaning in on the Cravings Value Menu, which is a $1 and $2 price points, and that's working to meet the needs of consumers, you know, with less money to spend. At the same time, they've been able to take price across the rest of the menu on their combos and more premium offerings, and that's working as well.

John Ivankoe
John Ivankoe
Analyst at J.P. Morgan

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

John Glass
John Glass
Analyst at Morgan Stanley

Yeah, no, you know, surprisingly, our business in Europe, and you can see it from the numbers, is doing quite well. We're not seeing, to the point of your question, we're not seeing an impact on adjacent businesses. We're seeing the prevailing factor there is just sort of return to mobility in Europe and the recovery of our businesses that were suffering more at this time last year.

John Ivankoe
John Ivankoe
Analyst at J.P. Morgan

Understood. Thank you.

Operator

Our next question is from David Tarantino of Baird. Your line is now open. Please go ahead.

David Tarantino
David Tarantino
Senior Research Analyst at Baird

Hi, good morning. Chris, I wanted to come back to your profit guidance for the year. I think you mentioned multiple times that you're working hard to over-deliver versus that plan. I wonder if you could just elaborate on what factors that you see could drive upside to the plan. You know, if you were to see upside, where would it come from, in your view? Then, secondly, I guess to balance the discussion, you know, where do you see the greatest risk to the current plan?

David Gibbs
David Gibbs
CEO at Yum! Brands

Yeah. Thanks, David. You know, as with all elements of our algorithm, we're always working to find ways to over-deliver. We called out the one primary driver, which on profit creates a headwind this year, which, you know, going into Q2, Q3, Q4, we're gonna lose 3 points of operating profit, plus the planned growth in Russia as we, you know, exclude those from the results and direct any profits from Russia towards humanitarian efforts. So that's the big headwind, of course. In the early going, as we said, this China softness is probably a little bigger than expected. You know, I don't know the long-term trajectory there.

David Gibbs
David Gibbs
CEO at Yum! Brands

You would think at some point in the long-term, you know, China will rebound and that business should see growth, but I'm sure the timing on that is uncertain. If you think about other puts and takes, I think emerging market strength. If you look at our 18% same-store sales growth in emerging markets, that's a great sign of recovery and a big important part of our business. So that's a place where, you know, you might see upside. Of course, you know, on the flip side, we'll continue to navigate the really dynamic environment around inflation, pricing, and how those are playing out in each of our markets around the globe. Right now, we think we're dealing with those incredibly well.

David Gibbs
David Gibbs
CEO at Yum! Brands

Our scale gives us advantage and gives our franchisees advantage in dealing with those. You know, very dynamic environment, but we feel really good about the overall profit engine of the business.

Jodi Dyer
Jodi Dyer
VP of Investor Relations at Yum! Brands

Operator, we have time for one more question this morning.

David Tarantino
David Tarantino
Senior Research Analyst at Baird

Thank you.

Operator

Our final question this morning is from Brian Mullan of Deutsche Bank. Your line is now open. Please go ahead.

Brian Mullan
Brian Mullan
Analyst at Deutsche Bank

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

David Gibbs
David Gibbs
CEO at Yum! Brands

Yeah. Brian, good question. Loyalty is becoming an increasingly important, you know, part of our business, increasingly important part of our digital experience that we provide to customers. More than half of our restaurants around the globe are part of a loyalty program. Taco Bell in the U.S. is a great example of how we're driving excitement through loyalty. That's what we did with the Taco Lover's Pass. That's helped to drive app downloads and people signing up into the program, and we've continued to see significant growth in membership in that program. Pizza Hut, obviously in the U.S., has a large and very impactful loyalty program, and KFC has great loyalty programs in a number of markets around the globe.

David Gibbs
David Gibbs
CEO at Yum! Brands

We're gonna continue to focus on that, implementing it in markets where it makes sense. Interesting question. Obviously, we've thought about it in terms of cross-brand loyalty. Right now we're focused on maximizing the value of our brand-focused loyalty programs, but obviously as our data and analytics capabilities continue to evolve, all sorts of possibilities are out there in the future. For the time being, we'll remain focused on brand-specific loyalty programs. Thank you, everybody. I appreciate your time. Just to wrap up, it was another strong quarter, obviously, with good top line sales growth, all brands growing. The development numbers, obviously, we continue to set records, which we're very proud of, and that's widespread, right? All of our brands grew at least 5% on a net new unit basis in the quarter.

David Gibbs
David Gibbs
CEO at Yum! Brands

Another digital sales record, which we keep saying on every call and we just keep on delivering on. Then this time we passed that important milestone of 40% digital mix. I just think it, you know, in total, the quarter represents our brands all around the world are healthy and can perform in any environment. This is certainly one of the most challenging ones we've ever had to deal with, proving the resiliency of our business model. Thank you for your time.

Operator

This concludes today's call. Thank you for joining. You may now disconnect your line.

Executives
    • Chris Turner
      Chris Turner
      CFO
    • David Gibbs
      David Gibbs
      CEO
    • Jodi Dyer
      Jodi Dyer
      VP of Investor Relations
Analysts
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