Yum! Brands, Inc.

Good morning. My name is Zetania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands Q4 2018 earnings release call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Per the leader's request, each participant will be allowed one question. Now I would like to turn the call over to your host, Mr. Keith Signer, Vice President, Investor Relations, Corporate Strategy, and Treasurer. Sir, you may begin your conference.

Thanks, Titania. Good morning, everyone, and thank you for joining us. On our call today are Greg Creed, our CEO, David Gibbs, our President, Chief Operating Officer, and Chief Financial Officer, and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from Greg and David, we'll open the call to questions. Before we get started, I'd like to remind you that this conference call includes forward-looking statements. Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements 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 the investor section of the Yum! Brands website, www.yum.com, to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call. Please note the following regarding our basis of presentation for today's call. First, system sales results exclude the impact of foreign currency. Second, core operating profit growth figures exclude the impact of foreign currency and special items. Third, the Revenue Recognition Accounting Standard was prospectively adopted on January 1, 2018. As a reminder, this is a GAAP-required change adjusting the timing of recognition of upfront fees received from and incentive payments made to franchisees, the effects of which have no impact on cash. In addition, it requires the gross-up of revenues and offsetting expenses of advertising funds we consolidate within our income statement. 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'd like to make you aware of the following changes in upcoming Young Investor events. Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10-K filing. First quarter 2019 earnings will be released on May 1, 2019, with the conference call on the same day. And last, we ask that you ask one question and one question only. I'd like to turn the call over to Mr. Greg Creed.

Thank you, Keith, and good morning, everyone. It's been a little over two years since we announced a substantial transformation of Yum! Brands, and I couldn't be more proud of what we've been able to accomplish since then. Focus on our four growth drivers, increased collaboration, and a new mindset are clearly fueling improved results. In aggregate for the year, Yum! delivered system sales growth of 5%, with 2% same-store sales growth, and 4% net new unit growth, excluding telepizza units. Additionally, 2018 was a year of significant milestones in bold restaurant development. We now have over 48,000 restaurants in approximately 270 brand country combinations. Together with our world-class franchisees, we opened, on average, eight gross restaurants per day or, in other words, one restaurant every three hours. As for the fourth quarter, I'm thrilled to share details of such a strong finish to a solid year. Items to note include a tremendous quarter at Taco Bell, where same-store sales grew 6%, another impressive quarter at KFC, where same-store sales grew 3%, and a continued slow and steady improvement at Pizza Hut US, with 1% same-store sales growth. Now, into the final year of our transformation, we continue to focus on our four key drivers to accelerate growth. As usual, David and I will talk to you through the lens of these four key growth drivers. I'll provide an update on our distinctive, relevant and easy brands, as well as unrivaled culture and talent. Then David will discuss bold restaurant development and unmatched franchise operating capability. He will also discuss our 2018 results, 2019 guidance and progress towards our transformation commitments. I'll begin with our three distinctive, relevant and easy brands. In the fourth quarter, KFC Division delivered system sales growth of 7% with same-store sales growth of 3% and net new unit growth of 5%. For the year, system sales grew 6% with 2% same-store sales growth and 5% net new unit growth. The unit growth in 2018 exceeded our expectations, delivering a record 1,134 net new units this year. This achievement in unit growth was broad-based with particular strength in China, Russia, Asia, Latin America and Central and Eastern Europe. KFC also saw widespread contribution to its 3% sales growth in the fourth quarter with notable strength in markets like Africa, China and Iberia. Africa continued to deliver results with 7% same-store sales growth in the quarter. This sustained momentum is the result of intense focus on value, backed by the introduction of the Zinger, an international fan favorite, and premium innovation like the new Dunked Burger. In addition, China reported 3% same-store sales growth for the quarter. This stemmed from transaction-driving promotions like the Christmas Bucket and Crazy Thursday Deals. And last but not least, our Iberia market delivered 6% same-store sales growth in 2018. Campaigns based on consumer proximity, using delivery aggregators, and it centered on the megabox five products for five euros drove the growth. Importantly, each of these markets grew same-store sales growth while accelerating net new unit development. Iberia, for example, opened 35 net new units, a 26% increase in units year over year. Now to the U.S. where we finished 2018 with our fifth consecutive year of positive same-store sales growth. We started off the year with the introduction by continuing our Taste of the South series with Smoky Mountain BBQ. We then followed this up with the debut of our Crispy Colonel Sandwich in April. In the fourth quarter, the team built on these platforms and debuted distinctive marketing and product innovation. First, southern-inspired hot honey chicken was offered in a tenders basket or sandwich style. Second and most notably, chicken and waffles featuring Mrs. Butterworth syrup was a huge hit. KFC's bold and cheeky marketing uniquely accentuated the delicious pairing to help KFC US deliver its strongest month of same-store sales growth for the year. With continued focus on value and innovation, we're excited for what 2019 has in store for this always original brand. Moving on to our Pizza Hut division, which celebrated its 60th birthday in 2018 by reaching a milestone of over 18,000 restaurants worldwide. This was in part due to our strategic growth alliance with Telepizza. David will give you more details on the alliance in a few minutes. I want to note that we closed the transaction in December, and while there is no significant P&L impact on the quarter, certain Telepizza units were included in the Pizza Hut division restaurant count. In the fourth quarter, Pizza Hut division yields system sales growth of 2% with flat same-store sales growth and net new unit growth of 10% for the quarter or 2% excluding Telepizza units. For the year, system sales grew 1% with flat same-store sales growth and 10% net new unit growth or 2% excluding Telepizza units. If you joined us during our Investor and Analyst Day, we mentioned being proud of the foundational improvements we have made but dissatisfied with the current system sales growth of our Pizza Hut division. For both the US and international business, sustainable improvements in sales growth will remain a slow build as we update and reposition the asset base and make the messaging more distinctive. International Pizza Hut system sales grew 3% in the quarter due to a 5% net new unit growth excluding Telepizza. We were pleased to see pockets of same-store sales growth progress in the fourth quarter, including in Mexico and Brazil. But overall same-store sales were flat as dine-in sales continued to weigh on overall results. As we mentioned during the third quarter earnings call and in New York at our investor day, the gap between dine-in channel sales and off-premise is significant, with both the US and international seeing a roughly 10-point differential. About 40% of our units outside of the U.S. are dine-in restaurants, with predominantly dine-in sales, and about half of these units are in China. We are leveraging best practices from our strongest international markets to provide targeted alternative asset solutions. In 2018, we found success in our off-premise focused asset options, including DELCOs, fast casual DELCOs, and express units. Combined, these modern off-premise focused restaurants represented 90% of total net new units in 2018, with particular success in India, Indonesia, Japan and Poland. The addition of nearly 1,300 telepitching units will accelerate the transformation of our estate to a more off-premise focused asset base. In the US, system sales increased 1% in the quarter with 1% same-store sales growth and a net new unit decline of 1%. We're encouraged by the operational foundation that's been put in place and continue to make strides to improve the brand's position. Over the year, we acquired Quick Order, our third-party online service provider. Running our own e-commerce platform will enable us to more quickly provide breakthrough products and convenient services to our customers that will allow for better franchise economics over the long term. In the fourth quarter, Pizza Hut US continued its emphasis on value. The $5 line-up, which features favorites like a medium one-top pizza, garlic knots, wings, and our new Cinnabon mini rolls, helped improve traffic and provides a pipeline for future product innovation. Our partnership with the NFL has brought attention to these value concepts and improved the distinctiveness of our messaging. Pizza and sports go hand in hand, and our partnerships with the players and teams should continue to bring the marketing to life. Now on to Taco Bell, where 2018 marked our seventh consecutive year of positive same-store sales growth, once again outpacing the industry, a remarkable feat. Fourth quarter system sales grew an impressive 9%, with system sales growth of 6% and net new unit growth of 3%. a testament to the strength of their leadership team and partnership with their franchisees. During the quarter, we doubled down on value in the U.S., with double versions of customer favorites, including the triple-double crunch wrap and double chalupa. Then fan-favorite rolled chicken tacos finished the quarter off strong. Taco Bell supported the quarter's value and innovation with distinctive brand moments as well. including celebrating our sixth annual Friendsgiving with an exclusive dinner at our Innovation Center and launching the Taco Bell Taco Shop, our online retail channel that features some fantastic holiday-themed swag that's sold out in days. Both of these events generated top-tier media buzz. As we enter 2019, Taco Bell remains focused on being a category of one for everyone. In addition to a relentless commitment to value and innovation for which Taco Bell is known, in 2019, Taco Bell aims to make it even easier to access for our customers. In fact, this morning, on the first anniversary of our strategic partnership with Grubhub, Taco Bell officially announced the national launch of Taco Bell delivery in over 4,000 restaurants across the US. Fans looking to enjoy their favorite menu items at home can jump onto Taco Bell.com or go directly to Grubhub.com or the Grubhub app to place their order. This launch is an important milestone on our journey to make the Taco Bell brand easier to access, and I want to thank the Taco Bell system and the Grubhub team for making this a reality. The Taco Bell International, there was a lot to be excited about as well. We took National Taco Day to more than 25 markets to generate awareness and drive sales. We leveraged U.S. product innovation like the Naked Chicken Taco in India and Korea and Naked Chicken Chips in the U.K. We had solid local innovation like the Crispy Patako in India and we even have delivery available in 15 markets and are testing kiosks in several countries. Unit growth is gaining momentum with continued profitable growth in India, Spain and new markets like Peru. In the U.K., development was also strong including our first three stores in London, where we announced our re-entry into the market in a way only Taco Bell can with the help of Big Ben's chimes. In 2018, our franchisees committed to over 1,100 international units under development agreements, augmenting our strong pipeline for future growth. This is only the beginning for Taco Bell International, and I'm excited to see the brand grow and expand. Now onto unrivalled culture and talent. As you all recently saw, the board of directors and I unanimously decided to promote David Gibbs to President and Chief Operating Officer. David is a long time young veteran and he's been instrumental in shaping our global strategy, accelerating the pace of global new unit development, executing our transformation and laying a strong foundation for future growth. In his new role, he now has direct oversight of each of the brands with the brand leaders reporting to him. I couldn't be more pleased for David to take on this role, and I look forward to his continued contribution and leadership. David and I, along with the Board of Directors, have taken a fresh look at our structure and long-term bench as we continue to focus on accelerating our growth. Coming out of that review, we feel great about the level of talent we have throughout the global organization and have been very fortunate to be able to promote so many top leaders internally. This includes the recent promotions of Tony Lowings as CEO of KFC and Vipul Chawla as President of Pizza Hut International. Additionally, we've made the decision to even further strengthen our bench and enhance talent as a competitive advantage for Yum by investing in select new world-class talent. First, and as we've already announced, we'll be hiring a CFO as David assumes his new duties. David will maintain his CFO responsibilities until a new CFO is in place. Second, with technology increasingly at the forefront of our strategic planning efforts and given its importance to all four of our growth drivers, we'll also be hiring a new senior leader, reporting to me, who is focused on global digital and technology strategy. This new role will lead to a coordinated cross-brand global effort to better leverage technology to drive sales and better economics for our franchisees. And finally, over the coming quarters, we'll also be looking to opportunistically bolster our brand leadership teams. In conclusion, I'm proud of the work we are doing around the world, with world-class leaders focusing on our four key growth drivers to build a world with more young. We remain confident as we lay the foundation of our transformation strategy to maximize shareholder value. And with that, It gives me great pleasure to introduce our President and Chief Operating Officer and Chief Financial Officer, David Gibbs.