Yum! Brands Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2023

There are 11 speakers on the call.

Operator

Hello, everyone. Welcome to the Yum! Brands Inc. 2022 4th Quarter Earnings Conference Call. My name is Charlie, and I'll be coordinating the call today.

Operator

You will have the opportunity to ask a question at the end of the presentation. Please note, we will only be taking one question from each person to ensure we get around to everybody in the queue. I will now hand over to your host, Gavin Felder, Chief Strategy Officer and Interim Head of Investor Relations to begin. Gavin, please go ahead.

Speaker 1

Thanks, operator. Good morning, everyone, and thank you for joining us. As a reminder, I will be covering for Jody Dyer while she is on maternity leave. On our call today are David Gibbs, our CEO Chris Turner, our CFO and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from David and Chris, we'll open the call to questions.

Speaker 1

Before we get started, please note that this call includes forward looking statements that are subject to future events and uncertainties that cause our actual results to differ materially from these statements. All forward looking statements are made only as of the date of this call and should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings And the following slides will be recorded in the press release and relevant sections of our filings with the SEC to find disclosures, definitions and reconciliations of non GAAP financial measures and other metrics used on today's call. Please note that during today's call, all system sales growth and operating profit growth Results exclude the impact of foreign currency. Please also note the following financial reporting treatment related to our exit from Russia.

Speaker 1

As a reminder, as of the beginning of the Q2, we elected to remove the Russia business from key performance metrics. For the purposes of this call, All references to system sales growth and unit growth results for the quarter are adjusted to remove our Russia business from the prior year base. This negatively impacted our worldwide unit growth by 2 percentage points and our worldwide system sales growth for both the Q4 and the full year by 2 percentage points. These units were removed from our same store sales calculations and thus did not impact same store sales results for the Q4 or full year. All GAAP figures reported continue to include the impacts of Russia operations for KFC for the full quarter year and for Pizza Hut prior to our transfer That business to a local operator in the Q2.

Speaker 1

These GAAP figures primarily include royalty revenues from continued franchise operations And G and A to support our Russia business. Additionally, our GAAP G and A includes expenses incurred relating to the transfer of ownership of the business. As a result of our decision to exit our Russia business, we have reclassed net operating profits from the operating segments in which they are earned Subsequent to the start of the conflict, to corporate and unallocated and reflected those net operating profits as a special item within the other income and expense line. For 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.

Speaker 1

This call is also being recorded and will be available for playback. Looking ahead, our Q1 earnings will be released on May 3, 2023 with the conference call on the same day. Now I'd like to turn the call over to David Gibbs.

Speaker 2

Thank you, Gavin, and good morning, everyone. 2022 truly was a landmark year for Yum! In spite of the challenges from significant spikes in commodity inflation and pockets of labor shortages, Our world class teams and franchisees partnered together to deliver another year of amazing growth. We achieved record breaking industry development, opening 4,560 gross units that translated to nearly 3,100 net new units, beating our prior record set Just last year and ending the year with over 55,000 restaurants globally. For the full year, Systems sales were up 8% and core operating profit was up 6%, which includes a 2 point headwind from the removal of Russia profits this year.

Speaker 2

Perhaps the most impressive performance came from Taco Bell, finishing 2022 with same store sales growth of 8%. Taco Bell also bucked the industry trend on margins, holding company operated margins flat from last year despite elevated industry wide cost pressure. KFC International delivered a record year, opening approximately 2,400 gross units and nearly 2,000 net new units, Translating to 9% unit growth. Combined, these two parts of the business account for approximately 80% of our divisional operating profit. We finished the year on a high note with system sales growth of 10% in Q4, driven by 6% same store sales growth And 6% unit growth contributing to 22% core operating profit growth, which includes a 2 point headwind from the removal of Russia profits Such incredible performance under highly challenging conditions underscores the tremendous confidence I have that even after a remarkable 25 years of growth as a public company, our best days are clearly ahead of us.

Speaker 2

Before I discuss our 2022 results in detail, I wanted to give a brief update on our planned exit from Russia. As mentioned during our Q3 call, we have a signed purchase agreement to Transfer ownership of our Russian KFC restaurants, operating system and master franchise rights to an existing KFC Russia franchisee. We expect the transaction to close following satisfaction of all closing conditions. Following the closing, we will have ceased our corporate presence in Russia. I also want to acknowledge the devastating impact of the earthquakes that happened earlier this week affecting our teams in Turkey.

Speaker 2

Our people remain our number one priority, and I want to recognize the efforts from our franchisee, Ilkham Sahin, as he and his team work to prioritize people's safety as they navigate through this tragedy. As we shared at our recent Investor Day, our strategy is guided by our recipe for good growth. And today, we will discuss our 2022 results through the lens of that framework. I will talk about 2 of our growth drivers, namely our Relevant, Easy and Distinctive Brands or RED for short and our unrivaled culture and talent. Then I'll provide an update on our efforts to drive the good agenda across our brands and our business.

Speaker 2

Chris will then share the details of our Q4 financial results before discussing our bold restaurant development and unmatched operating capabilities growth driver. I'll start by discussing our iconic RED brand. Beginning with the KFC division, which accounts for 49% of our divisional operating profit. KFC full year 2022 system sales grew 9%, driven by 7% unit growth and 4% same store sales growth. Q4 system sales for KFC increased 10%, thanks to 7% unit growth and 5% same store sales growth.

Speaker 2

Results were unfavorably impacted by COVID related challenges in China. Excluding China, our KFC business continues to grow at an unbelievable pace With same store sales growing 9% in the quarter, driven in part by our world class franchisees and continued impressive momentum in our emerging markets. At KFC's international business, which represents 44% of our divisional operating profit, Q4 system sales grew 11%. Several markets showed stellar results. In Japan, for example, KFC is synonymous with the Christmas holiday family meal.

Speaker 2

In this year, Japan system sales over the Christmas period grew 16% year over year. Africa drove double digit same store sales growth in the quarter and continues to benefit from several customer facing digital initiatives. To build on that success, our South Africa team will continue to roll out kiosks with a goal of installing them in 95% of our stores by 2023. Moving on to our Taco Bell division, which represents 35% of our divisional operating profit. On a global basis, full year system sales grew 11%, driven by 8% same store sales growth and 5% unit growth.

Speaker 2

This team continues to deliver industry leading results, and coupled with the incredible array of talent in place and our strong franchisee partnerships, It should be no surprise that Taco Bell earned the top spot on Entrepreneur Magazine's Franchise 500 ranking for the 3rd year running. Moving on to our Q4 results, Taco Bell U. S. Grew system sales 14%, underpinned by an exceptional 11% same store sales growth. The powerful momentum from previous quarters continued with the relaunch of the cult classic Mexican Pizza for which we provided early access to our loyalty members.

Speaker 2

We ended the year with around 45,000,000 Mexican pizzas sold, an impressive number considering they were only available for 4 months of the year. We also made encouraging progress in our breakfast layer, building on high profile branding partnerships such as Doja Cat in Q1 And Davante Adams in Q3, Taco Bell brought in Pete Davidson to help drive consumer buzz for breakfast. This led to 9% transaction growth for the daypart. Overall, Taco Bell did a terrific job this quarter at balancing both ends of the consumer spectrum by featuring premium products that a consumer's crave such as the grilled cheese burrito With sharply priced items like nacho fries. At Taco Bell International, Q4 system sales grew 23%, Driven by 29% unit growth and 4% same store sales growth.

Speaker 2

Q4 closed a truly breakthrough year for our international business, which has now crossed the 1,000 unit mark. To put this feed into some historical context, Taco Bell International has built 40% of its current Within the last two years, it wasn't just our development engine on fire this year. Many of our markets reached double digit Same store sales growth in 2022, including some of our largest markets with India up 33%, Thailand up 36% And Spain, up 20%. Next, at the Pizza Hut division, which accounts for 16% of our divisional operating profit, Our full year system sales grew 3%, led by 4% unit growth and flat same store sales growth. Pizza Hut International, which accounts for 9% of our divisional operating profit, achieved system sales growth of 4%, driven by 6% unit growth And a 1% decline in same store sales in the 4th quarter.

Speaker 2

Results were heavily impacted by the ongoing COVID related challenges in China. Ex China, our same store sales remained healthy, growing 4%. Several markets showed noticeable strength, including Japan, Where same store sales grew 10%, owing to a strong holiday performance and recent product launch of Tuscany pasta bowls that featured a local flavored twist. At Pizza Hut U. S, which accounts for 7% of our divisional operating profit, Q4 system sales grew 5%, driven by 4% same store sales growth And flat unit growth.

Speaker 2

The strength in the quarter was driven by a combination of factors that included new advertising to highlight both premium and value offerings, Growth partnerships with aggregators and the success of the new Melts product. Melts over indexed the pre dinner time frames and individual occasion tickets and help to recover the lower household income base due to its strong value proposition. Lastly, Five distinct national marketing campaigns on Uber Eats and DoorDash helped aggregator transactions grow 30% in the quarter. Lastly, at the Habit Burger Grill, the team continues to make progress on setting up the business for long term growth. Habit's burgeoning digital channel finished the year strong with digital mix ending at 35%, a truly impressive level after only launching in 2020.

Speaker 2

I'm pleased to share that Habit is now 18% franchise, which is up 5 points from last year. With $2,000,000 average unit volumes And a compelling growth strategy, I'm confident in the long term growth of our newest brand. And now on to our unrivaled culture and talent growth driver. Our whole market Yum! Continues to be our people first culture, which drives retention and recruitment of amazing talent.

Speaker 2

Highlights in 2022 included bringing our top 250 leaders from around the world together for a Global Leadership Summit and celebrating the important role our world class talent has played as we marked our 25th anniversary as a publicly traded company. Internally, we continue to promote talent naming a President of the Abbott Burger Grill and a new President of KFC US. Externally, we attracted top talent welcoming a new Global Chief Brand Officer for Taco Bell, a new Global Chief Operating and Transformation Officer for Pizza Hut And a new Chief Corporate Affairs Officer for Yum! When it comes to all the good we do, we released our 20 21 recipe for good report during the year detailing our strong progress around our 3 priority areas. With our science based targets to decrease greenhouse gas emissions by 46% by 2,030, we decreased emissions against our 2019 base by approximately 24% for company owned buildings and our corporate restaurants, while our franchisees decreased emissions by 20%.

Speaker 2

Regarding better packaging, we published a new global harmonized packaging policy with a focus on eliminating unnecessary packaging, shifting to more sustainable materials and supporting better recovery and recycling systems. We increased the number of women and senior leadership globally 2 42%, which keeps us on track to achieve gender parity and leadership globally by 2,030 in alignment with Paradigm for Parity. We were pleased Yum! Received industry leading rankings on the Carbon Disclosure Project and inclusion on the 2022 Dow Jones Sustainability Index North America, the 2023 Bloomberg Gender Equality Index and Newsweek's list for America's Most Responsible Companies and America's Greatest Workplaces for Diversity. To wrap up, I'm thrilled with our 2022 performance, particularly given many of the unpredictable obstacles our team had to navigate.

Speaker 2

Our results continue to reflect our resilient, diversified business and the strength of our portfolio led by our iconic brands. I'm confident we will continue to execute with superior performance and deliver industry leading growth, all of which will help to maximize value to our shareholders. With that, Chris, over to you.

Speaker 3

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, Our bold restaurant development and unmatched operating capability growth drivers followed by our capital strategy. As David mentioned, 2022 was a year of huge milestones for Yum! The resilience and winning mindset shown by our teams around the world Helped us open a record breaking 4,560 gross units or 3,076 net new units on a full year basis. These development numbers put full year unit growth at 6%.

Speaker 3

System sales for the year grew 8%, Driven by strong international same store sales growth for KFC and another stellar performance from Taco Bell. Full year core operating profit grew 6%, which includes a 2 point headwind from the removal of Russia profits this year. 4th quarter system sales growth of 10% was in line with the update we shared at our Investor Day, driven by 6% same store sales growth and 6% unit growth. Core operating profit grew 22%, which includes a 2 point headwind from the removal of Russia profits this year. Reported operating profit included a negative $42,000,000 foreign currency translation impact in the 4th quarter and a negative $118,000,000 impact to the full year.

Speaker 3

Ex special general and administrative expenses came in at $357,000,000 and approximately $1,100,000,000 for the full year. Taco Bell store level margins were 23%, flat year over year. Taco Bell paid additional discretionary bonuses to its store level employees given the strong performance for the year, which impacted quarterly margins by approximately 50 basis points. Taco Bell's full year store level margin was 24%, Near the upper end of its 23% to 24% historical pre COVID margin range. 4th quarter ex special EPS was $1.31 a 29% increase versus the prior year.

Speaker 3

EPS growth was positively impacted by core operating profit growth of 22% and the lower current year tax rate. This was partially offset by the year over year impact of a current year mark to market loss on our equity investment in a franchisee in India lapping a prior year gain as well as the aforementioned negative impact of foreign currency. The ex special tax rate in the quarter was 12%, due in large part to the release of a valuation allowance associated with deferred tax assets that we now believe we will be able to utilize. Our full year ex special tax rate was 21%, in line with our full year expectations of 21% to 23%. Now let me share greater detail on our 4th quarter unit growth in the context of our bold restaurant development growth driver.

Speaker 3

This quarter, we opened 18 30 gross new units, resulting in 4,560 gross units Open for the full year or the equivalent of more than one new restaurant every 2 hours. Nearly 90% of new store openings in 2022 occurred outside the United States across 112 countries, proof that our diversified development engine is stronger than ever. Starting with KFC, the team opened 997 gross new units in the 4th quarter With China, India and Thailand leading the charge. The Pizza Hut division had incredible development results, Opening 571 gross new units in Q4 with 5 countries contributing more than 25 units, namely India, Indonesia, Canada, China and Turkey. The Taco Bell division opened 253 gross new units In Q4, and 4 96 restaurants for the full year.

Speaker 3

In fact, Taco Bell U. S. Open 250 gross new units this year, the 2nd highest annual amount ever. For 2022, Taco Bell International set a record with 246 gross new units, exceeding the prior record of 179 units set last year. I'm thrilled to report we crossed the 1,000 Taco Bell unit threshold internationally And we soon expect to have 4 countries that have over 100 units with China joining Spain, India and the UK.

Speaker 3

Lastly, Habit added 33 gross new units in 2022, representing a year over year growth rate of 10%. This level of growth, which includes a significant number of company owned units, creates some short term noise in company owned restaurant margins Due to the inclusion of pre opening expenses and the depressed margins that are normal during the initial months of operations before new stores reach maturity, Average margins for Habit's stores open more than a year remain much stronger than our overall reported Habit Company store margin. To finish with development, as we head into 2023, we remain confident that we will maintain our strong momentum. We exited 2022 with record site registrations for new units at Taco Bell U. S.

Speaker 3

And we have over 80% Of 2023 planned units at KFC and Pizza Hut outside of China committed with well capitalized growth ready franchise partners. Next, I'll discuss our unmatched operating capabilities and the three pillars of our digital strategy: Easy Experiences, Easy Operations and Easy Insights. I'll start with an update on our Easy Experiences pillar, which focuses on delivering seamless customer experiences through proprietary technology and dedicated operational programs. In 2022, we expanded the rollout of TikTok, our conversational commerce and e commerce platform Across our network and finished the year with Tuk Tuk in over 3,200 stores across 49 markets. We processed millions of digital orders in 2022 with Tuktuk continuing to prove it can bring in incremental customers and drive Digital sales.

Speaker 3

This is evidenced by the chat ordering launch in KFC Mexico, where more than 90% of users who transacted on the chat channel had Previously not placed a digital order on other channels. We plan to roll out TikTok to more than 1,000 new stores In 2023, including its white label e commerce platform, which went live in Pizza Hut Chile And Taco Bell Canada in Q4 2022. Moving on to our easy operations pillar, which centers on the team member and franchise partner experience. The rollout of Dragon Tail is ramping up in Pizza Hut U. S.

Speaker 3

With over 4 50 stores onboarded by the end of 2022 and plans to reach up to 1,000 stores by the end of Q1. Globally, we expect to have Dragon Tail in over 7,000 stores by the end of 2023. At Pizza Hut US, we have completed the integration of 2 major aggregator channels into our point of sale system. And at Taco Bell US, we have fully integrated our delivery as a service partner into our stores technology system. These integrations are important in helping our team members process delivery orders with new levels of ease.

Speaker 3

Lastly, I'll cover our Easy Insights pillar, which leverages the power of data and analytics to allow our teams to make smarter decisions. I want to highlight 2 key initiatives that our Yum! Decision Sciences team have been working on, namely recommended ordering and Cook Schedule. Recommended ordering is an artificial intelligence machine learning module that predicts and recommends The quantity of product for a restaurant manager to order each week with the goal of reducing product waste And intra store transfers of inventory. The product has been rolled out to 3,000 U.

Speaker 3

S. Stores across Taco Bell and KFC. Cook Schedule is a similar module that helps predict the correct amount of food and timing to cook product to accurately meet demand. The team is working primarily with KFC on this initiative with plans to pilot in an international market soon. Finally, I'll provide an update on our balance sheet and liquidity position.

Speaker 3

Our net leverage ratio ended the year at 5 times, including a small balance on our revolving credit facility that was used to support share repurchases in the 4th quarter. We will enter 2023 with no significant maturities until 2026 and approximately 94% of our debt Fixed, excluding our revolving credit facility balance. I will reiterate that our capital priorities Are guided by maximizing shareholder value. This includes investing in the business, maintaining a resilient balance sheet, Offering a competitive dividend and continuously evaluating the optimal use of our excess cash. To that end, I am also pleased to announce That this week, our Board of Directors approved an increased quarterly dividend of $0.685 Our capital expenditures for the quarter net of refranchising proceeds were $99,000,000 Our net capital expenditures for the year came in at $206,000,000 reflecting $73,000,000 in refranchising proceeds And roughly $279,000,000 in gross CapEx.

Speaker 3

With regard to our share buyback program, we repurchased 4,100,000 shares in the quarter at an average share price of $119 per share, totaling approximately $486,000,000 For the full year, we repurchased 10,000,000 shares At an average price of $119 per share and totaling $1,200,000,000 Overall, we are extremely pleased with these results given the complexities our teams faced. Navigating such challenges with industry leading performance Affirms the confidence we have to deliver our recently raised long term growth algorithm of 5% unit growth, 7% system sales growth and at least 8% core operating profit growth. Looking to 2023, We wanted to provide a few guardrails for modeling purposes. First, we expect to deliver on our long term growth algorithm with healthy unit growth momentum continuing into 2023. We expect Taco Bell Company operated margins to be in line with full year 2022 margins, and we expect our 2023 G and A To be approximately $1,150,000,000 in line with the guidance provided at Investor Day.

Speaker 3

In terms of the shape for the year, The year over year growth in G and A will be highest in the first half, largely owing to the timing of our G and A expense plan across the year. Based on rate expectations as of today, we expect our interest expense to be up approximately 10% year over year and for our leverage ratio to drift modestly lower in 2023. Finally, we expect our full year tax rate to be 21% to 23%. To close, we are extremely proud of the performance of our brands over the past year and look forward with excitement to deliver another year of compelling growth and shareholder value in 2023. With that, operator, we are ready to take any questions.

Operator

Thank you. Please note we'll be only taking one question from each person to ensure we get around to everybody in the queue. Our first question comes from David Tarantino of Baird. David, your line is open. Please go ahead.

Speaker 4

Hi, Good morning. My question is about the profit outlook for 2023. And I was Wondering how you're thinking about the puts and takes related to potential upside or offsetting Factors and then in particular, I was curious about the China business. It seems like there's potential for China To recover and be additive to your overall profit algorithm for this year. And I was curious To get your view on whether that would be an upside lever or you would think about potential offsets to that factor for this year?

Speaker 4

Thanks.

Speaker 3

Yes. Hey, David. Thanks. Good question. As we look forward to next year and beyond, we're still confident In the future, as we shared at Investor Day with the raised algorithm, we feel confident in the trajectory of the business, And nothing has changed in that outlook as we come into 2023.

Speaker 3

As you mentioned, The China component of our sales, you heard you on China talk last night about being cautiously optimistic. So we'll continue to work with them. But in the long run, we are very bullish on the China market

Speaker 5

As it comes out of COVID, but of

Speaker 3

course, the timing of that is uncertain as they shared on the call last night. Of course, to the extent that we have a rebound in that China sales, it does come at a lower royalty rate As you factor that into the plan for the year, the other elements I think are in line with the What we shared in the algorithm, you heard the guidance that we shared on G and A for next year. And so our focus is on driving that growth. And of course, Every day it's our mission to come in and over deliver on that algorithm if we can.

Speaker 4

Thank you.

Operator

Thank you. Our next question comes from Dennis Geiger of UBS. Dennis, your line is open. Please go ahead.

Speaker 6

Thanks, Chris, for that color on G and A for the year, helpful. Wondering, David or Chris, if you could speak just a bit more to the strength that you're seeing From a sales momentum perspective globally and the resilience really across the brands in the cart macro and how that guides sort of how you're Thinking about 2023, if consumer pressure increases, I mean strength at Taco Bell, KFC Non China International Pizza U. S. Even momentum building. Just any additional color given the last several months momentum for how you think about 2023, particularly if globally the macro situation gets worse.

Speaker 6

Thank you.

Speaker 5

Yes. Strength is a good word, Dennis, and it really It was widespread as you mentioned. We feel great about the fact that all of our brands are really on a roll right now. You saw that in the results for the quarter. And the consumer environment, much like my comments last quarter, remains a positive environment for us generally globally.

Speaker 5

Obviously, there are pockets of challenges when you have things like lockdowns in China last year, but that flips to be a more potentially a positive for this year. But the consumer in the U. S. On the high end, we're actually seeing more frequency from that consumer and we're seeing Possibly driven by a little trade down into our brands, which is all good. And then on the lower end, as I mentioned last quarter, Consumers are starting there's a little bit more interest in value, which our brands are perfectly positioned to deliver on.

Speaker 5

You're seeing that with our menu offerings, Taco Bell with the cravings menu and $2 Burritos, the new Meltz product at Pizza Hut, which is a screaming value. KFC just rolled out wraps as you guys are probably aware of at a great value price point. So I think the environment sets up well for us From a consumer demand standpoint, more of the same. And then on the labor side, we're seeing an increase in applications, stores returning To their pre COVID operating hours, which is great that we're able to stay up the stores now appropriately. So when you mix it all together and we like the environment we're in, I also saw some data about grocery inflation in December Being pretty high, so I think relative to alternatives, we're still very attractive option.

Operator

Thank you. Our next question comes from Andrew Charles of Cowen. Andrew, your line is open. Please go ahead.

Speaker 6

Great, David. A little

Speaker 7

bit of segue to my question. Can you talk about your philosophy for how you plan to balance pricing versus value for Taco Bell U. S. In 2023? By our call from the Investor Day, you tend to take most of the price on new menu innovation as far as the premium.

Speaker 7

I was wondering for a way to perhaps get more aggressive on value if you needed while preserving the strong margins the brand has reached and perhaps can you just remind us as well what was the level Pricing from Taco Bell U. S. In 4Q as

Speaker 5

well. As far as Taco Bell and the amazing job They do segmenting their consumers and providing each consumer what they want. That's what we talked about at Investor Day. And obviously, Taco Bell Has some amazing value offerings that have been in their menu now for quite some time on the cravings value menu, but it doesn't it's Targeted to a certain set of consumers and HALO is the entire business. So as the environment gets more competitive, we're already In the value game at Taco Bell, we're already doing a great job.

Speaker 5

I don't see us changing anything. We're connecting and we're winning because of value. That's why you saw the great numbers that we just put up in the quarter. But the brand with amazing margins, steady year over year Just has all the tools at its disposal to navigate any kind of

Operator

Thank you. Our next question comes from David Palmer of Evercore. David, your line is open. Please proceed.

Speaker 8

Thanks. Congrats on the very strong unit growth. I wonder how You're thinking about EBIT margin over time. In 2022, it was 32%. It's been near 35% before, but business mix is always changing.

Speaker 8

I wonder though how you think about that margin over time. Do you think you could Get back to a 35% or so in the next few years. And I'm thinking about certain flow through like a China license fee recovery could be Very good incremental margins. And so I'm just wondering how you're thinking about the potential for that EBIT margin? Thanks.

Speaker 3

Yes. Thanks, David. I think in general, we focus on delivering the algorithm And the profit growth that's embedded there, if you think about puts and takes on EBIT margin, obviously from a Core operating profit standpoint, you do have to consider the royalty rate mix. I mentioned earlier to the extent If any of our lower royalty rate markets were to grow faster than the others, you have to take that into the account in the modeling. We did talk about at Investor Day on G and A and how we're going to have a lower G and A growth rate going into next year than we've had the last few years.

Speaker 3

So we're going to be managing that carefully in 2023. And then of course when you go to reported profit, Reported operating profit, you have to take into account FX. And FX was a headwind this past year, pretty hard to predict. Nobody has The crystal ball on that. I will share that right now, as we look to 2023, FX will continue to be a headwind for us Based on our current estimates, primarily in the first half, we think on a full year basis, our best estimate is between a 30 The $40,000,000 headwind going into the year, we'll continue to update that as things change.

Speaker 3

So it's our push to drive the strong profit growth implied in the algorithm and

Speaker 5

that's where we're focused.

Operator

Our next question comes from Jon Tower of Citigroup. Jon, your line is open. Please go ahead.

Speaker 7

Great. Thanks for taking the questions. Just two quick ones. G and A came in a bit higher than I think guidance had You guys have been targeting for guidance. I just wanted to confirm maybe there was some one timers in there.

Speaker 7

Is there something else that might have hit that line? And then Outside of that, we've heard from another number of other operators that 2023 started off on some strong footing in the U. S. And frankly across the globe. So I guess I'm asking if there's any reason to believe that Yum!

Speaker 7

Brands wouldn't have been participating in that strength globally?

Speaker 3

Yes. First on G and A in Q4, we had reported G and A of $1,140,000,000 but that included special expense. We had approximately $20,000,000 in special expense. So we landed broadly in line with our full year plan, a little bit to the high end of our plan range. There were a number of small items, None of the major, but I'll give you one example.

Speaker 3

As we had to split out the Russia business to prepare for sale, we lost some of the fixed cost leverage In our European G and A, but again, going into next year, as I mentioned earlier, the philosophy that we shared at the Investor Day still holds. We are focused on having a lean G and A model while investing in the things that drive long term growth and health, And we'll have a lower G and A growth rate into 2023. In terms of how the 2023 is shaping up, as I said earlier, there's nothing that we're seeing at the start of the year that Dampens our confidence in delivering our long term growth algorithm this year and beyond.

Operator

Thank you. Our next question comes from John Ivankoe of JPMorgan. John, your line is open. Please go ahead.

Speaker 9

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

Speaker 5

Yes. Thanks, John. It is hard to talk about a business where we have 290 different brand country combinations, which is 290 different stories. But in general, We obviously saw a shift to off premise consumption during the pandemic. We've seen some of our on premise Consumption come back, but really for none of our brands is back to where we were, which isn't a bad thing given the efficiency of operating an off premise model.

Speaker 5

Our ability with new unit development to build slightly smaller stores that are more efficient with better returns for franchisees. As far as the consumer, I Mentioned this earlier, but it does depend if we're looking at the U. S. Or other developed markets, The environment is still positive, just very similar to what we saw last quarter. We are seeing some increase in our higher frequency customers, our higher income customers coming more frequently and some of that is no doubt Due to trade down into our brands.

Speaker 5

On the lower end, we're not seeing the low income consumer drop out of our business. What we're seeing is probably a little bit more focus on value and that's been a trend that's been continuing throughout 2022 into 2023. And we're there for them with our brands with perfect offerings for them. And in emerging markets, obviously, Earlier in the pandemic were a challenge. They've come back now and our emerging developed markets are performing roughly similar around the world.

Speaker 1

Operator, we have time for one more question.

Operator

Of course. Thank you. Our final question of today comes from Gregory Francfort of Guggenheim. Gregory, your line is open. Please go ahead.

Speaker 10

Hey, thanks for the question. I just want to ask about Pizza Hut U. S. It seems like the business has picked up the last few quarters and I'm curious if you're seeing Share gains or increased pricing or just any thoughts on what's going on there would be helpful. Thanks.

Speaker 5

Yes. I'm glad you asked about Pizza U. S. We're really proud of what the team is doing and the success they had in the quarter and the They're building in the business. I know the franchisees and the team are working incredibly collaboratively.

Speaker 5

And I do believe getting Share gains in the category and attracting new consumers. They're doing that a couple of different ways. Number 1, how they're playing aggregators With the partnership with aggregators and how we've integrated into our IT systems, we're seeing a significant lift In our transactions with aggregators, we started the year with about 5 transactions per store through aggregators. Now we're up to close to 50 by the end of the year. That's a massive progress and obviously helping us access some consumers We're using the brand, but it's also the look, tone and feel of the advertising.

Speaker 5

You'll notice that that's changed. It's a much more modern contemporary Approach, which is connecting well with consumers. And then finally, it all comes down to the product. The launch of Melts It's been very successful for the brand, attracting younger consumers to different occasions than we would traditionally use Pizza Hut. So that all adds up to a very positive story for the Pizza Hut U.

Speaker 5

S. Business. And thank you for the question. I think with that, we'll wrap it up. And I think the numbers speak for themselves.

Speaker 5

It was another incredible quarter and wrapping up a great year despite many challenges. I'll point out, we actually Close the year with over 4,500 gross new units being built. Take the 4,100 we built last year, That's 8,600 gross new units. That means one out of every 6 locations you see around the world was built in the last 2 years For our brands, I think that shows the momentum that we've got in the business. Our Yum!

Speaker 5

China team talked about the great returns they're getting from their new unit development last year, coupled with the top line growth that we're seeing in existing stores, and there's a lot to be excited about as we head into 2023. Thank you for your time today.

Operator

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

Powered by Quartr
Earnings Conference Call
Yum! Brands Q4 2022
00:00 / 00:00