Yum! Brands, Inc.

Good morning, my name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brand second quarter 2019 earnings release conference 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, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. We ask that you please limit yourself to one question. I would now like to turn the conference over to Keith Signer, Vice President, Investor Relations, Corporate Strategy, and Treasurer. Sir, you may begin.

Thanks, Operator. 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 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 our earnings releases and relevant sections of our filings with the SEC 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, all system sales results exclude the impact of foreign currency. Second, Pizza Hut division in worldwide system sales and net new unit growth include the benefit of the increase in units in the fourth quarter of 2018 related to our strategic alliance with Telepizza. Same store sales growth reflects the inclusion of Telepizza in the prior year base. Third, core operating profit growth figures exclude the impact of foreign currency and special items. Fourth, the lease accounting standard was prospectively adopted on January 1, 2019. As a reminder, this is a GAAP-required change resulting in the recognition of operating lease assets and liabilities on the balance sheet. We do not expect a change in our income statement or cash flows as a result of this accounting change. And last, please note that 2019 results will include a 53rd week. We're 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 10Q filing. Third quarter 2019 earnings will be released on October 30th, 2019 with a conference call on the same day. Now, I'd like to turn the call over to Mr. Greg Kreese.

Thank you, Keith, and good morning, everyone. We're pleased to report another strong quarter with system sales growth of 10%, including 5% same-store sales growth and 7% net new unit growth. Focus on our four growth drivers, Increased collaboration and our unrivalled culture continues to fuel these results. As usual, David and I will talk you through the lens of our four key growth drivers. I'll provide an update on our relevant, easy and distinctive brands, or RED for short, as well as unrivalled culture and talent. Then David will discuss bold restaurant development, unmatched franchise operating capability and some additional and exciting news on talent. I'll begin with our three RED brands. I'm thrilled to report that KFC delivered its 16th consecutive quarter of positive same-store sales growth. Encouragingly, this global powerhouse is seeing broad-based strength across the world with standout performances across many of our largest markets, which translated into a truly impressive global system sales growth of 10% with same-store sales growth and net new unit growth of 6% each. Now, many of you have been asking, what's fueling the recent broad-based performance? Well, there are a number of factors, including the consumer is healthy. KFC has a robust digital and delivery strategy globally, with over 12,000 restaurants delivering on just one metric. And broadly speaking, at Yum, our focus on being a world-class franchisor has led us becoming more intentional about fostering collaboration and leveraging the power of Yum. A perfect example of this is the KFC annual market planning meeting, which is one of the first global collaboration meetings we instituted, and which continues to gain momentum and impact each year. In fact, our recent 2019 KFC MPM had a record number of franchisees and team members in attendance. We also attended the Pizza Hut MPM earlier this week, and I was impressed with how Vipul Chawla and the teams are so focused on the things that matter most. But again, MPMs are just one example of fostering collaboration to drive results today, and into the future. Without question, these forums for collaboration are a unique competitive advantage for all our franchise partners and team members globally. Now back to KFC's quarter. Internationally, sales call-outs include Japan, Africa, Iberia, Indonesia, Germany, Australia, China, Latin America, and the Caribbean. You'll notice I included more markets than usual, but again, strength was broad-based with eight out of 13 markets reporting at or above 6% same-store sales growth. And while each market is unique, the recipe for success has a consistent theme. It's disruptive value coupled with amplified innovation compounded by an effective digital and delivery strategy. Specifically, Japan and Africa led the way, each with double-digit same-store sales growth. Japan's 18% same-store sales growth was driven by a renewed focus on value and the well-received Chicken Pack and Parry Parry Chicken innovation. Africa's 10% same-store sales growth was backed by the Rapster Lunchbox value promotion and the innovative Crunch Double Down. Iberia's 11% same-store sales growth was driven by continued momentum from strong media campaigns and our third-party delivery partners. Now to KFC US, where same-store sales grew 2% in the quarter. Continued focus on the core menu items was balanced with an accelerated pace of promotions. The quarter began with innovation, first bringing back the very successful chicken and waffles and then introducing Cinnabon biscuits. Value also remained a focus through launching a new channel for a la carte menu items, a two for $6 mix and match. Combined, our new value proposition drove transactions for the quarter and allowed customers flexibility to build their own meals. KFC continues to partner with Grubhub to add locations for delivery and click and collect throughout this year, and also expects to launch a branded web experience by year end. We now have 2,300 KFCs offering delivery and 3,500 restaurants available for click and collect. We're excited about the operational ease and the increased check growth for our franchisees, and we look forward to updating you more throughout the year. Moving on to our Pizza Hut division, In the US, system sales grew 4% with same-store sales growth of 2% and flat unit growth. We're happy to report that transactions for the quarter grew 3%, which is the result of continued compelling value, ops execution, and our growing loyalty program, Hut Rewards. As you may have seen earlier this week, in partnership with our franchisees, we've updated the $5 line-up to the $5 and up line-up, where we will continue to offer the same favorites at more flexible price points. We expect this to be a win for franchisees by addressing local economic factors, particularly in high wage markets, while customers benefit from the balance of compelling everyday value and unique only from Pizza Hut innovation. While we're pleased with the positive transaction growth this quarter, we understand more clearly than ever that same-store sales growth in the US will continue to be choppy without transforming the asset base. And following the tremendous recent improvements in operations and technology led by Artie Starrs and the Pizza Hut leadership team, we plan to lean in to accelerate the transition of our Pizza Hut US estate to a more modern delivery and carry out focused asset base. This will ultimately position the Pizza Hut brand for many years of faster growth in the US. We are excited about collaborating with franchisees who are capable, well capitalized, committed to the brand, and who have a growth mindset to accelerate the closure of underperforming dining stores and replacement with new delivery or fast casual delivery assets. By the same token, we also know we'll need to directly address franchisees who are burdened with too much debt, don't have access to capital, or aren't committed to the long term. Thus, in a few cases, some of these businesses will need to be restructured in the near term to address capital structure and leverage issues, particularly those franchisees with greater dine-in exposure. We view this as a positive move for the brand and David will provide more specifics in a few minutes. Before moving on to Pizza Hut International, I want to briefly update you on our excitement regarding our partnership with Grubhub and the opportunity to leverage it as an additional sales channel for Pizza Hut. As a reminder, while customers are placing their orders on the Grubhub app or website, Pizza Hut drivers are completing the delivery to ensure our hot, fast, and reliable experience. We ended the second quarter with over 300 locations on Grubhub, and are planning on expanding the tests further in the third quarter. While it's still early days, we found that the Grubhub customers are incremental, and some customers are therefore trying our craveable products for the first time. Pizza Hut International System sales grew 15% in the quarter, driven by a 10-point benefit from the addition of the Telepizza units in Q4 of last year, while same-store sales growth was 2%. We were pleased to see same-store sales growth in places like China, Europe, Brazil, Indonesia, and Hong Kong. I recently visited Latin America and got to see some of our newly converted Telepizza units. I'm so impressed with the team and how they are executing at a high level to drive tremendous early results. Internationally, the same store sales gap between the dining channel and off-premise sales was approximately three points this quarter. Encouragingly, the smaller gap arose from an improvement in our international dining business as our two largest dining markets, China and the UK, performed well. Pizza Hut continues to develop tailored action plans for our largest dining markets while at the same time transforming the estate for a more compelling off-premise focused asset strategy. And last but definitely not least, Taco Bell where system sales grew 10% with same store sales growth of 7% and net new unit growth of 3%. Taco Bell has now reported positive same store sales growth in 17 of the last 18 quarters including 12 consecutively. So kudos to the entire team for such amazing results. Starting with the US, we continue to have a focus on both value and innovation, starting Q2 with the $1 loaded nacho taco, followed by the $5 grande nacho box and the return of nacho fries. The grande nachos box was a particular standout as demand was extremely high, a truly abundant value at just $5, with sales mix peaking at 10%. We also welcome back nacho fries for our fourth faux movie trailer, breaking weekly sales records twice during the promotion. The buzz worthy moment of the quarter was the announcement of the Bell Hotel in June. Reservations for a Taco Bell inspired stay in Palm Springs sold out in two minutes. Our all access strategy to create a frictionless customer experience is sharper than ever. Taco Bell now has kiosks in over 4,900 restaurants and expects to have the full US rollout completed this year. Delivery is now live in 4,500 Taco Bell restaurants In the US, an opportunistic market expansion should increase restaurant coverage over time. The customer experience has been positive, with the number one reason for getting Taco Bell delivered being the craving for the food. Mobile and online ordering continue to be a priority, and we are seeing strong results with over 11 million registered users. Additionally, click and collect functionality is available nationwide on TacoBell.com and the Taco Bell app. Taco Bell International saw strong sales momentum around the world, driven by the focus on cult icons, value boxes at power price points and product innovation. Our value boxes introduced earlier this year continue to drive growth in India, the UK and Spain. India's positive same-store sales growth was driven by the launch of their Big Bell Box and Queso Looper. We continue to build global brand awareness by successfully incorporating US programs into globally relevant promotions. For example, Canada participated in the Steal a Game, Steal a Taco NBA Finals promotion for the first time and saw fantastic results. Now to unrivaled culture and talent. As you've heard me say before, we have two important assets, our brands and our people. We feel great about the level of talent we have and have been very fortunate to be able to promote so many top leaders internally. As we've mentioned on previous calls, we've made the decision to even further strengthen our bench and enhance talent as a competitive advantage by investing in new world-class talent. I'd like to start with an enthusiastic thank you to David Gibbs for his incredible leadership as President and CFO of the last three years. He was a great partner to me as we spun off YonChina and adopted our financial and business strategy to be more focused, more franchised and more efficient, all with accelerated growth. Since the beginning of the year, he's worn three hats, adding the Chief Operating Officer to his responsibilities, and leading the brands to impressive results while we undertook a search for a new CFO. And with that, I'm excited to have Chris Turner join the Young family as Chief Financial Officer. Chris will begin reporting to me after following about 10Q on August 8th, and will assume global responsibility for finance, corporate strategy, supply chain, and information technology. From his time at PepsiCo to his years at McKinsey & Company, Chris is a broad-thinking business leader who brings nearly 20 years of strategy, finance, and operations experience. His deep commercial experience in the quick service and retail sectors, a track record of growth leadership, and commitment to culture and talent development make him a perfect fit for the CFO role. He's also deeply knowledgeable about digital and technology solutions shaping the future of retail, which will be invaluable to YUM given the role technology will play as we leverage our scale to improve franchise unit economics and accelerate same-store sales growth and net new unit growth. We've also finalised our roles for our brand CEOs, as David will discuss in more detail in a few minutes. And finally, we take our role as a global citizen and our impact on society and the environment very seriously. We've recently updated our recipe for good, which outlines our public commitments concerning food, planet and people. We've made tremendous progress over the past year when it comes to advancing our citizenship, and sustainability agenda to drive socially responsible growth and manage risk better. From working to remove antibiotics in our protein supply chain to expanding our deforestation commitments to progressing our work around diversity inclusion, I truly believe we are leveraging our scale to help address major global issues. And with that, it gives me great pleasure to introduce our President and Chief Operating Officer, David Gibbs.