Yum! Brands Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 7 speakers on the call.

Operator

Hello, everyone, and welcome to the Q2 2023 Yum! Brands Incorporated Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. After the presentation, there will be the opportunity to ask a question and we ask that you please limit yourself to one question each. I I'll now turn the call over to Jody Dyer, Vice President of Investor Relations.

Operator

Please go ahead, Jody.

Speaker 1

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 the 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 That could cause our actual results to differ materially from these statements.

Speaker 1

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 relevant sections of our filings with the SEC to find disclosures, Please note that during today's call, all systems sales growth and operating profit growth results exclude the impact of foreign currency. For more information on our reporting calendar for each market, please visit the Financial Reports 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.

Speaker 1

Looking ahead, our Q3 earnings will be released on November 1, 2023, with a conference call on the same day. Now I'd like to turn the call over to David Gibbs.

Speaker 2

Thank you, Jody, and good morning, everyone. At our Investor Day last December, We shared our long term vision for Yum! To deliver accelerated global growth. I'm proud to say that our second quarter results are further evidence of our ability to execute against this vision. 2 of Yum!

Speaker 2

Differentiated capabilities are bold restaurant development engine, including 10 25 gross new units in the current quarter And our distinctive digital capabilities, which drove record digital sales, fueled the 2nd quarter's 13% growth in system sales. I'm especially pleased to report that based on our strong year to date results and the continued momentum we see in our business, We expect to deliver full year 2023 results well above our long term growth algorithm. I'll start with a few high level thoughts on our Q2 results before sharing some additional details through the lens of the relevant, easy and distinctive brands And unrivaled culture and talent pillars of our Recipe for Good Growth framework. Chris will then provide some additional color on our 2nd quarter results, Followed by an update on our bold restaurant development and unmatched operating capabilities growth pillars. For the Q2, we delivered same store sales growth of 9% and unit growth of 6% with KFC setting the pace with remarkable 19% System sales growth on the foundation of our industry leading development momentum, distinctive marketing campaigns And relevant new product layers such as the launch of original recipe hand breaded chicken nuggets here in the U.

Speaker 2

S. And as I'm sure you've all heard, Taco Bell in partnership with another global icon, LeBron James successfully liberated Taco Tuesday In a way no other brand could mimic. As we also discussed in December, our recipe for good growth will be powered by digital and technology. Our distinctive digital capabilities, which enable easier experiences and greater access to our iconic brands continued to unlock incremental sales through higher spend and frequency as well as incremental profitability for our system. On that note, I'm pleased to report another quarter of double digit growth resulting in $7,000,000,000 in digital sales, Representing over 45% of our global system sales.

Speaker 2

Turning back to our recipe for good growth and our iconic RED brands, Let me start with the KFC division, which represents 50% of our divisional operating profit. 2nd quarter system sales growth of 19% It was driven by 13% same store sales growth and 7% unit growth, widespread transaction growth and a strong recovery in our China market, as Yum China detailed in the results earlier this week, powered our same store sales growth. However, even outside of China, KFC Global same store sales growth was up an impressive 10% in the quarter. KFC represents our largest digital business globally on a dollar basis and showed continued momentum with strong year over year growth In both digital sales and mix, among KFC's emerging markets, I'd like to highlight our Middle East team for the work they did to drive system sales with a focus on their core menu and new snacking product offerings And the South Africa team for their efforts to grow the breakfast layer through a bold marketing campaign with Trevor Noah. Thanks to unlocking additional customer use occasions, compelling value offerings and continued digital growth, Both markets posted strong same store sales growth.

Speaker 2

Among our developed markets, Western Europe led the way with strong results in check and transactions By balancing disruptive value and core menu items. Turning to KFC U. S, same store sales grew 5%, Improving sequentially with the combination of product innovation and an always on value strategy. Building off Q1 momentum behind wraps, KFC U. S.

Speaker 2

Launched hand breaded original recipe chicken nuggets to expand its off the bone chicken offerings, Leveraging the learnings from our significant off the bone business at KFC International. This product innovation was met with an immediate positive consumer resulting in over 100,000,000 nuggets sold in the 1st 8 weeks after launch. These bonus offerings appeal to younger and new KFC customers And build upon an already well established sales layer following the successful launch of the chicken sandwich in 2021. Moving on to the Taco Bell division, which represents 35% of our global divisional operating profit and 75% of our U. S.

Speaker 2

Divisional operating profit. Once again, I'm thrilled to share more external recognition of Taco Bell's brand Our relevance with the brand's inclusion on the TIME 100 list of the world's most influential companies. This category of 1 brand remains ever relevant by pushing boundaries and introducing and reintroducing exciting and craveable menu items And always being part of the cultural moment and conversation. Congrats to the entire Taco Bell team and our incredible franchisees For yet another well deserved honor. For the Q2, Taco Bell's global system sales grew 7% Led by 4% same store sales growth and 5% unit growth.

Speaker 2

Taco Bell continues to execute its magic growth formula Through a balanced set of commercial strategies including building brand buzz, unparalleled value, mass occasions and digital initiatives. This quarter, the team launched a campaign to liberate Taco Tuesday in a first ever global Taco Tuesday campaign spanning 19 markets In partnership with a true global icon, Lebron James. The campaign created massive brand buzz with engagement and mentions in 1 week for Taco Tuesday Liberation surpassing the entirety of the highly successful Mexican Pizza relaunched last year. Other promotions in the quarter contributing to Taco Bell's winning Magic Growth Formula include Both are $5 Cravings Trio and Deluxe Build Your Own Cravings Box that helps sustain our strong consumer value proposition And maintain over 25% margin. In addition, an expansion of trading hours with strong growth at both the breakfast and late night dayparts Helped Taco Bell's 2nd quarter results.

Speaker 2

Finally, the team continues to create incremental demand for their digital channels. In the U. S, digital sales increased almost 35% year over year with kiosks now deployed in 100% of Taco Bell stores. Taking all of this into account, it is no surprise Taco Bell continues to be a leader in value perception While also delivering amazing unit economics. For Taco Bell International, system sales grew 18% Driven by development momentum, the global Taco Tuesday campaign, which launched in June and will continue through the Q3, Leverages Taco Bell's U.

Speaker 2

S. Cultural leadership, building brand equity and consumer awareness with a consistent look and feel around the world. I also want to highlight Taco Bell's continued progress against our recipe for good growth strategy that included raising $20,000,000 so far this year through its Sound Up Fundraiser. Throughout the quarter to the Taco Bell Foundation donated these funds to over 400 nonprofits And nearly 1,000 Liv Mas Scholarships. Next, I'll discuss the Pizza division, Which accounts for 14% of our divisional operating profit.

Speaker 2

System sales grew 7% for the quarter, Driven by 4% same store sales growth and 4% unit growth. Peaside International grew system sales 11% Led by 6% same store sales growth and 5% unit growth. The individual occasion continued to be a growth driver largely on incremental Transaction growth from the Meltz platform, which in the U. S. Has proven to be a self sustaining layer at an attractive entry price point.

Speaker 2

Since launching in the U. S. Late last year, Melds has now reached 35 markets, up significantly from the 11 markets in the Q1, Now in over half of our global store base, Melt is delivering encouraging early results alongside MyBox, Our other international individual occasion product offering. Our team is focused on providing distinctive value brings across markets such as the Superlimo abundant value deal in the UAE and the National Pizza Party promotion in Australia. Pizza Hut U.

Speaker 2

S. Grew system sales 2%, driven by 1% same store sales growth. In the U. S, we introduced new flavor profiles to our Melts platform providing yet another reason for customers to order from Pizza Hut. The Habit Burger Grill division grew system sales 9% On 7% unit growth, the Habit team continues to lean into its menu strategy of culinary forward limited time offerings, Highlighting its craft brand positioning through their elevated craveable offering.

Speaker 2

We continue to And access points for our customers with the rollout of kiosks now in over 60% of stores. On average, kiosk sales see 10% higher checks Compared with front counter sales and excellent profit flow through, yet another proof point of the value from converting to digital sales. Moving to our unrivaled culture and talent growth driver, which continues to be the foundation of our success. To start, I'd like to recognize Taco Bell Division CEO, Mark King, who will retire at the end of the year. As we celebrate the legacy that Mark will leave at Taco Bell, We're thrilled that Sean Trezvant will become the CEO of the Taco Bell division effective January 2024.

Speaker 2

Sean joined Taco Bell's Chief Brand Officer 2 years ago and earlier this year expanded his role to Global Chief Brand and Strategy Officer. With Sean's clear vision and strong track record of driving transformative Red innovation, I'm confident that Taco Bell will continue to successfully execute It's long term global growth strategy. This is a great reminder of how people are truly at the center of everything we do, Which is also reinforced in our Global Citizenship and Sustainability Report, which was published last month. The report Our strategic investments in socially responsible growth, risk management and sustainable stewardship of our 3 priority pillars of people, food and planet. I'd like to take a moment to highlight work on key issues across each pillar, including the quality, packaging and carbon reduction.

Speaker 2

We remain committed to our purpose of unlocking opportunity, in part through our $100,000,000 commitment over 5 years that we announced in 2020 To knock down barriers to equity, inclusion, education and entrepreneurship around the world. Through our unlocking opportunity initiative, We have funded and activated more than 30 social impact programs in 11 countries, enabling markets to develop localized programs to deliver meaningful change In communities where we operate. We also continue to make progress towards achieving vendor parity and leadership roles by 2,030 With 43% of global leadership roles held by women in 2022. These are just two examples of the great progress we've made And of how Yum! Commitment to its people first culture has never been stronger.

Speaker 2

In addition, we continue to make progress around sustainable packaging, Building upon our harmonized cross brand packaging policy that was introduced last year. Furthermore, we've had great success as we march toward our Climate goal is to reduce our greenhouse gas emissions by nearly 50% by 2,030. To date, our teams have achieved a 57% reduction in greenhouse gas emissions at corporate restaurants and offices coupled with a 28% reduction at Franchise Restaurants. Reflecting on the first half of the year, our teams have put forward an impressive set of results. And looking forward, the picture we see for the second half of the year will be similarly strong.

Speaker 2

Our confidence comes from our recipe for good growth strategy and the fact that category leaders Taco Bell U. S. And KFC International drive 80% of Yum! Divisional operating profit. The vast majority of our U.

Speaker 2

S. Operating profit is driven by Taco Bell, a leading brand in both cultural relevancy and affordability, while globally KFC is positioned with unmatched scale advantages and growth minded franchise partners eager to capitalize on opportunities in their markets and widen their competitive moat. In an uncertain environment, we know that consumers make decisions with value in mind. The good news is that our brands have always stood for tremendous value In addition to convenience, experience and craveable food, this is a winning combination that will continue to differentiate us from our competitors. And when coupled with our recipe for good growth strategy, I am confident that we can continue to deliver on our long term vision For accelerated global growth in 2023 and beyond.

Speaker 2

With that, Chris, over to you.

Speaker 3

Thank you, David, and good morning, everyone. Today, I'll discuss our 2nd quarter financial results And our bold restaurant development and unmatched operating capability growth drivers before turning to our capital strategy. I'll begin with our Q2 results. We delivered 13% system sales growth, driven by 9% same store sales growth And 6% unit growth. Digital sales improved at all 4 of our brands with total digital sales up nearly 30% Year over year, core operating profit for the quarter grew 12%.

Speaker 3

Taco Bell store level margins were an impressive 25 0.6%. We continue to expect full year Taco Bell Company operated margins to be similar to margins in 2022. Taco Bell's ability to deliver such strong margin performance despite mid single digit inflation once again Demonstrates the power and resilience of their business model and preserves their compelling unit economics, which remain near an all time high. For Habit, company operated margins improved to 11%, thanks to better leverage of Yum! Purchasing scale as well as efforts to improve store level labor productivity.

Speaker 3

We're encouraged with the margin improvement progress at Habit And we'll continue to invest in the long term growth of the business. And as a result, we expect a small operating loss for the division this year. Ex special general and administrative expenses were $280,000,000 in line with our expectations. The ex special tax rate for the quarter was 18%. Finally, our 2nd quarter EPS excluding special items Was $1.41 per share.

Speaker 3

2nd quarter EPS was positively impacted By unrealized investment gains of $0.09 relating to our investment in Deviani offset by a negative foreign currency translation impact Given our strong first half results and continuing momentum into the second half of the year, I'm happy to report that we expect on a full year basis to over deliver on all components of our long term growth algorithm. We expect full year 2023 core operating profit to grow low double digits, Which is ahead of our long term guidance of at least 8%. We expect second half G and A expenses to be modestly higher Relative to our initial plan, primarily attributable to above target incentive compensation accruals Resulting from our strong performance and which we began recording in Q2. As a reminder, employee incentive compensation is tied The internal performance targets linked to components of our long term growth algorithm. The accrual We booked throughout the year can go up or down depending on our performance.

Speaker 3

Consistent with our prior G and A guidance, We still expect our year over year G and A growth to be lower in the second half of the year. Balance of year, We expect the Q3 year over year G and A growth rate to look similar to the growth rate in the first half, followed by a year over year decline in the 4th quarter. Finally, we've faced a $44,000,000 Foreign currency headwind year to date and our current forecast is for little to no FX impact to reported operating profit in the balance of the year. Now moving on to Bold Restaurant Development. We opened 10 25 Gross new units during the quarter contributing to 6% unit growth.

Speaker 3

We are encouraged by the excitement among our growth ready franchise partners We continue to expect that the benefits of our scale and the health of our franchise system Will allow us to further widen our development advantage relative to the industry. As you've heard me say before, the Yum! System It's made up of world class franchise partners who are truly 3C, committed, capable and well capitalized. As a result, we expect 2023 will be another incredible year of development similar to 2021 2022, which were both industry record setting years. Let me share a few highlights of our unit development in the quarter beginning with the KFC division, Which opens 600 gross new units.

Speaker 3

Yum! China's development momentum reaccelerated With 375 gross new units opened this quarter, putting their year to date development ahead of last year's pace. The remainder of KFC's unit growth was widespread across markets led by India, the Middle East and Asia. As for the Pizza Hut division, the team opened 357 gross new units led by China, India, Spain, Turkey and the U. S.

Speaker 3

With each opening at least 20 units. In June, The Flynn Restaurant Group announced its first international expansion With an agreement to acquire Pizza Hut Australia, which owns approximately 260 Pizza Hut units. This is a great example of a 3C partner eager to grow within our system. For those unfamiliar with The Flynn Restaurant Group, They are the largest franchise operator in the U. S.

Speaker 3

Restaurant industry with roughly 2,400 restaurants, Including nearly 300 Taco Bells and nearly 1,000 Pizza Huts. For some perspective, in 2022, Glen accounted for roughly 20% of the Pizza Hut U. S. New builds and their overall same store sales growth Significantly outperformed the rest of the U. S.

Speaker 3

System. Taco Bell development remains on track for another record setting year with 63 gross new units, Including 27 in international markets across 8 countries. Totaling it all up, Yum! First half unit development Reflects nearly 1800 gross new units, a fantastic result that demonstrates the resilience of Yum! Development engine despite a more challenging macro environment.

Speaker 3

Next, I'll turn to our unmatched operating capabilities That contributes to our position as the global franchisor of choice. This includes our distinctive digital strategy to unlock improved customer experiences Lead to faster sales growth and better store level margins. With that, let me discuss the 3 pillars of our digital strategy. Beginning with the easy experiences pillar, this quarter the KFC US team leveraged the Yum! Commerce platform, Which was first launched with KFC US in 2021 to enable a Diablo IV limited time promotion In partnership with Activision Blizzard and offered customers exclusive in game rewards in exchange for KFC purchases.

Speaker 3

By leveraging our in house technology, we were able to build the necessary infrastructure and integrations To support this exciting gaming promotion in a matter of weeks. Previously, the process would have taken months with significant third party expense. This quarter, we achieved a significant milestone in expanding the Yum! Commerce platform as Taco Bell U. S.

Speaker 3

Migrated its digital traffic onto the platform. All of Taco Bell's web, mobile and delivery as a service digital transactions are now processed through this platform. Additionally, Pizza Hut Peru became the 1st international market to begin using the Yum! Commerce platform this quarter. We will continue to migrate additional brands and markets to the Yum!

Speaker 3

Commerce platform over the coming quarters, including Pizza Hut U. S. Throughout 2023 in several international markets. Within the easy operations pillar, we continue to expand adoption of both recommended ordering And our Yum! Point of sale system.

Speaker 3

As you may recall, recommended ordering is an AI machine learning module that predicts and recommends The quantity of each product a restaurant general manager should order. Recommended ordering was deployed in another 800 stores this quarter and is now live In over 4,400 KFC and Taco Bell U. S. Stores, our Yum! Next generation cloud first point of sale system improves operational efficiencies and enhances team member effectiveness.

Speaker 3

Taco Bell US is leading this rollout having deployed this system to 1,000 stores this quarter and targeting 5,000 stores by year end. Finally, for our EZ Insights pillar, we are advancing our digital strategy and using a new Customer data platform solution to provide a unified view of customers across our U. S. Brands and third party aggregators. This will enable us to improve digital experiences for our customers and ultimately increase customer frequency.

Speaker 3

Eventually, this and other internal programs will provide the infrastructure to unlock personalized marketing, joint branding and future automation. This is the latest step in our vision to one day achieve 100% of sales powered by digital. Lastly, I'll provide an update on our balance sheet and liquidity position. As a reminder, our strategy is to enable growth while maximizing shareholder value. In doing that, our capital priorities remain unchanged, investing in

Speaker 2

the business for the long

Speaker 3

term, maintaining a resilient balance sheet, Paying a competitive dividend and maximizing shareholder value by returning excess capital through debt paydowns and share repurchases. Net capital expenditures for the quarter were $34,000,000 reflecting $60,000,000 in gross CapEx And $26,000,000 in refranchising proceeds. Our net leverage ratio declined to 4.7 times, reflecting our previously stated intention to allow net leverage to drift modestly lower this year. Keep in mind, we have an upcoming bond maturity of $325,000,000 in November of this year, our only maturity until 2026. Furthermore, our current outstanding debt has a weighted average remaining term of 6 years and our greater than 90% fixed Floating ratio is attractive in the current market environment.

Speaker 3

We paid down $164,000,000 on our revolver, Leaving a minimal balance at the end of the quarter, we continue to evaluate the best use of our excess capital and at current interest rates, We believe funding our upcoming debt maturity before share repurchases best optimizes shareholder value. To round out our prepared remarks, I'm incredibly pleased with our strong year to date results and continued momentum, giving us confidence we will deliver full year 2023 results Well above our long term growth algorithm. Our brand teams and franchise operators remain vigilant in the pursuit to maximize performance And in turn deliver exceptional shareholder value. With that, operator, we are ready to take any questions.

Operator

Thank you. We will now begin the question and answer session. Our first question today comes from the line of Dennis Geiger with UBS. Dennis, please go ahead. Your line is now open.

Speaker 2

Great. Good morning folks and

Speaker 4

thank you. I wanted to ask a question on the 2023 outlook commentary for growth, Well ahead of the algo at low double digit. Could you touch maybe a bit more on the momentum that you spoke to heading into the second half, including any Sort of visibility that you have into the top line, which I think is particularly encouraging in the current environment. And then any additional puts and takes To profitability beyond the helpful call out that you mentioned on the call. Thank you.

Speaker 2

Yes. Look, as far as the second half of the year, obviously, we're confident. We're well above algorithm and we confirmed that in our prepared remarks. Just to give you a little visibility on why we feel that way, Taco Bell U. S, for example, has got very Strong momentum as we come into Q3.

Speaker 2

They've launched value. And if we look at all of our businesses on a 2 year sales trend, which I think evens out Some anomalies, we see basically a continuation of what we saw in the first half of the year.

Speaker 3

And Dennis on the Profit trends, we mentioned that we now expect full year core operating profit to be low double digits. And I think we gave a lot of color In my comments earlier on the drivers of that, around G and A and expectations in the back part of the year, Continuing trends from the first half in Q3 and then a year over year decline in Q4. We were also pleased to have Improving margins in our company operated store base, you saw a 200 basis point improvement there In our biggest driven by improvements in our biggest store basis and we're going to continue to manage that. I don't think there's anything else to call out In terms of color on back part of the year.

Operator

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

Speaker 4

Thanks. Good morning. You've consistently said that Yum! Brands is built to showcase blue chip like resiliency position to win in any environment And that dynamic seems to be proving out with 9% same store sales growth in the second quarter and You seem to be pointing to a continuation of healthy trends. Can you just help us understand what the drivers currently are For this resiliency and if you believe the macro has indeed become more challenged recently across your portfolio despite So continuation of very strong results.

Speaker 2

Sure. And I appreciate the commentary. Just as far as why are we able to navigate this kind of environment, look, I have a lot of confidence in our brand leaders and our marketing teams around the world. In so many ways, we're writing the playbook for how to build brands in this industry. We have Collider, which is an internal group that provides so much to us in terms of our the insights on the consumer behavior.

Speaker 2

And I think that all just shows up in the way we build these brands, being top 100 brands in the world. As far as the macro challenges, This is an environment that I would say is a more normal operating environment. We've come out of a series of years where things have been a little bit More different than we've ever had in the past, but I wouldn't call it a difficult environment to operate in. One way to think about it is just to break down our markets between developed and emerging. In the developed markets, we saw mid single digit sales Growth this quarter, it's a stable positive environment and we're past really inflation peak in most markets, obviously in the U.

Speaker 2

S. That's been well documented. And this is an environment where we can succeed. Value is rising in importance, but we have solutions and in many ways are leaders with our brands. KFC for U.

Speaker 2

S. For example in the quarter, their most growth was seen in their low income Because they had always on value for the quarter, as I mentioned in my prepared remarks. So we can win in this environment in developed markets. Similarly, Western Europe has been documented as a challenged environment for a lot. For us, we had good results there.

Speaker 2

Our France and German markets Did a great job of mixing innovation and value and delivering strong growth there. So developed markets, A little bit more of a return to normal, more stable, and our brands are built to win in those markets. In emerging markets, Yes. It's a little bit of a different story. We're seeing double digit sales growth for the quarter, A little bit more vary, but in general, we're not past the peak of inflation in a lot of these markets.

Speaker 2

So we're still taking pricing in some of these markets to cover that inflation, Able to pass it on to consumers, but very importantly, we've got positive transaction growth in those markets. So we're still growing our share In the industry, at the same time, we're navigating a little bit more challenging environment in those emerging markets. But when you add it all up, as you said, we're proven To demonstrate how resilient our brands are and how we can operate really in any environment and win.

Operator

Our next question comes from the line of Jon Tower with Citi. Jon, please go ahead. Your line is now open.

Speaker 5

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

Speaker 3

Yes, John. We're excited about the Progress that we're making on all aspects of the digital strategy. And so you're asking about the e commerce platform, which is a core part of our easy experiences Capability set and we talked about some of the benefits that we derive whenever we platform systems like this. We think it really ultimately drives faster profitable growth for our franchisees and for us. The ways that you do that, We talked about the Diablo IV experience in KFC U.

Speaker 3

S. It allowed us to implement a marketing campaign much faster than we normally would. And of course, as you get that platform across more markets, across more brands, we talked about the big milestone implementing in Taco Bell, You then are able to implement campaigns in multiple geographies or multiple brands much more quickly because you don't have to build integrations For each discrete technology platform that we've had previously across the business. In addition, you've got just robust capabilities At the base and you build tailored front ends that are relevant to each market and brand on top. So at the end of the day, we're driving profitable growth for our franchisees and for us through the strategy.

Speaker 3

Franchisees obviously benefit from that and they share in the investments that we make through our digital fees that we have in certain markets. But at the end of the day, this is an ROI driving move for both our franchisees and for us.

Operator

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

Speaker 6

Hi, thank you. Obviously, quick service in the U. S. And in Europe has been driven By a very high amount of average ticket increase over 2019 at least and a lot of that has been price, but also the consumer You're trading up on the menu, larger sizes, what have you, premiumization. There's been a lot of different factors of that.

Speaker 6

I was wondering if you kind of see, I

Speaker 5

don't know if I want

Speaker 6

to see risk or opportunity for kind of an unwind of that To some extent, obviously, your quick service over time had to especially the franchisors of quick service have been very focused on driving Incremental transactions because it's very rare where an incremental transaction doesn't drive incremental profit. So do we have an opportunity, I guess, over time to kind of think about a higher transaction driven model, higher dollar profit Driven model that actually might sacrifice percent margin. I mean it's we came off of such an unusual period In ticket growth over the next 4 years, I'm wondering kind of how you see the future in terms of the direction of ticket and transactions?

Speaker 2

Yes. Thanks for the question, John. You're absolutely right. Obviously, one of the first things that got disrupted in the pandemic was sort of transactions and ticket size. The one thing I would add to the list that you mentioned is also party size.

Speaker 2

As we became much more of an off premise delivery business, we did see number of parties per ticket go up. So that might have translated to a slight decline in transactions, but not in the number of eaters in our business. But the great news is for this quarter, We had good transaction growth in our businesses. And that's when I was talking about a more return to normal, We are seeing more individual meal occasions, let and then party size go back down, which I think is just the reality of Coming out of the pandemic, and our business is growing transactions and growing share all around the world. So I think you're probably right.

Speaker 2

We're going to get back into that And that just not to sound like a broken record, but I feel like we're winning, playing that game.

Operator

The next question comes from David Palmer with Evercore ISI. David, please go ahead. Your line is open.

Speaker 4

Thank you. Lots to like in the quarter with the unit growth, the KFC results, the 30% digital sales growth too. I'm wondering though I know there's going to be some curiosity about Pizza Hut, particularly in the U. S. And then just maybe a comment about whether you see this thing This division being an ongoing stable same store sales grower, I wanted to ask because a lot's Happened and there's been improved marketing, innovation like Melt, the 3rd party delivery.

Speaker 4

The system's a lot more profitable today, but Big competitors now doing business with 3rd party delivery and comps were slower in the quarter. So also I'm sure there's going to be some curiosity How you think the brand will do in a slowing economy? So any sort of thoughts about how you think that brand is positioned well to be an ongoing same store sales Positive brand. Thanks.

Speaker 2

Great. Thanks for the question. I'll take the first part and then I'll let Chris talk about the aggregator landscape. First of all, on Pizza Hut, big picture 7% of system sales growth in the quarter is on algorithm. They're a nice contributor to Yum!

Speaker 2

Overall growth. And really importantly, they're gaining share in the category through the numbers on relative to some of their peers. So we love what's going on at Pizza. A lot of that is the leadership team. Aaron Powell and the team that he's built leading that brand Are doing a lot of things differently.

Speaker 2

You're seeing them innovate with things like Melch, which is bringing in a lot more individual occasions, accessing incremental business for us. The other thing about the way they're operating, which gives me a lot of confidence in the future is we're able to run the brand like a global brand. That hasn't always been the case. So what you saw with Melts for example is they're now already in over 50% of the stores around the world. That's sort of unprecedented for us to be you do something you want something in the U.

Speaker 2

S. It works pretty well, but every market's got their own challenges, you've got supply chain challenges, you've got different business cases. But they've got the whole world united sharing data, sharing best practices and that is only leading to a stronger business So I think we're pretty happy with where we are at Pizza, particularly when you're on algorithm and gaining share. That's a pretty good starting point. I'll let Chris talk a little bit about that aggregator space and how we're thinking about the competitors there.

Speaker 3

Yes. Look on the aggregator front, if I Zoom way out at a Yum! Level, we're very pleased with our aggregator approach around the globe and the results that's produced in Each of our brands and in a large number of markets around the globe in Pizza Hut and specifically in Pizza Hut We implemented last year and we've been pleased with the incremental customers that we found on the market And the incremental delivery capacity that we've been able to utilize when needed. Of course, keep in mind, this was always our strategy. I wasn't here in 2018 when the leadership team started this aggregator strategy, but recall that we knew that team knew The aggregators would have an impact on the industry.

Speaker 3

We wanted to be where the customers wanted to transact with us and we made an investment in one of the aggregators Give us a front row seat to understanding how this space would evolve. And remember, it was our Pizza Hut CEO who actually sat on the Board of that aggregator. That experience helped to define our strategy. We always intended to implement in Pizza Hut and it's gone as And of course, going forward, we think we have some differentiating capabilities that will help us Sustain our competitive advantage in pizza with the aggregators, one of those is Dragon Tail, which helps to optimize The delivery operations in our restaurants, including our interface with the aggregators, plus we've got some first mover advantages around Marketing expertise and talent in that space that we think will help us continue to drive that business going forward in Pizza Hut.

Operator

Our next question comes from the line of Brian Harbour with Morgan Stanley. Brian, please go ahead. Your line is now open.

Speaker 5

Yes, good morning. Thank you. I just wanted to ask about Some of the kind of cost trends that your franchisees were seeing, obviously, we can kind of see your company store margins, be curious if that's Also true for a lot of your franchisees on food costs, is some of that favorability starting to show in other markets or do you think that'll Be more about 2024 as they sort of passed peak inflation.

Speaker 3

Yes, good question. Our Your focus is on ensuring that we always are providing strong relative value to our customers and that our franchisees Always have strong unit economics in the long run. That second piece of course is a key driver of our Differentiated development capability. If we think about where unit economics are around the globe, They are still very strong. Now from a market to market standpoint, you've got puts and takes in terms of The timing of when inflation is hitting the market, the nature of it.

Speaker 3

In developed markets, we believe we're past the point of peak year over year inflation. And that's part of what David was mentioning in terms of a return to a more normal operating environment in some emerging markets that Those inflationary waves were a bit delayed relative to developed markets. But in all markets, we are using our scale to offset As much of those inflationary pressures as we can, we're optimizing the business model with the franchisees and of course we use pricing As needed to help ensure the unit economics remain strong while still providing a strong relative value. If you think about our development results in the quarter, 10 25 units open, That's the best evidence that Unit Economics remains strong. Our 3C franchisees continue to put their capital to work.

Speaker 1

Operator, we have time for one more question please.

Operator

Thank you. Our final question today comes from the line of David Tarantino with Baird. David, please go ahead. Your line is now open.

Speaker 5

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

Speaker 3

Yes. Thanks, David. Overall on G and A, we take a lean philosophy. We've talked about that before. And that implies that we will invest in the areas that drive long term growth, health in the business and we're going to be efficient on everything else.

Speaker 3

We came into the year that was with a plan that was consistent with that philosophy. That plan is largely intact. But as we said, in the back Part of the year, we will see modestly higher G and A relative to that initial plan and the primary driver of that is higher incentive comp Owing to our strong performance. Of course, as you think about next year, that incentive comp resets each year, but that's been The primary driver on the change in the plan. We talked earlier about the color on the back part of the year around Q3 looking similar to first half and then a year over year decline in Q4.

Speaker 3

But net net on the full year, we expect G and A leverage and of course our long term algorithm implies G and A leverage in the business. So, I think it's that gives you a pretty good picture of how we're thinking about it and how the results are playing out.

Speaker 2

Thanks, Chris. And I'll wrap up. I want to thank everybody for being on the call and just reiterate this was another really strong quarter for Yum! With widespread growth, all brands contributing, system sales at all of our brands were on or above algorithm and that 19% System sales number at KFC is something to be proud of. And we're doing we're getting those results the right way.

Speaker 2

It's all about the digital growth, The development, our franchisees being profitable and a lot of that comes back to the talent that we have at Yam! I was pleased to announce this quarter that Sean is taking over for Mark. Very few companies have that kind of talent in place to just step in and we know we won't miss a beat and he'll take the business to a higher level at Taco Bell. I will share one fun stat with you if you haven't done the math on this. Just in the last two and a half years, we have added 10,000 New gross units to the Yum!

Speaker 2

System. That's nearly 20% of our stores were built in the last two and a half years. You think about our brands with 60 plus years operating history, but they couldn't be more new and fresh to consumers And they couldn't really be performing any better if you think about the results for the quarter. So truly astounding. I want to thank all of our team members and our franchise partners That helped bring that growth to life every day, and thank you all for being on the call.

Operator

Thank you, everyone, for joining us today. This concludes today's conference, and you may now disconnect.

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Earnings Conference Call
Yum! Brands Q2 2023
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