Yum! Brands, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Yum! Brands Q4 2019 earnings release. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone. Please be sure to limit yourself to only one question. Please be advised that today's conference call is being recorded. If you should acquire assistance from the operator, please press star zero. I would now like to hand the conference over to Keith Signer, Vice President, Investor Relations, M&A, and Treasurer. Sir, please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us. On our call today are David Gibbs, our CEO. Chris Turner, our Chief Financial Officer, and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from David and Chris, we'll open the call to questions. Before we get started, I'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. We'd like to remind you that the Habit Burger drill transaction is subject to approval by their stockholders and other customary closing conditions. This transaction is expected to be completed by the end of the second quarter of 2020. As such, please understand that we are limited in what we can discuss on today's call. Please note the following regarding our basis of presentation. First, all system sales results exclude the impact of foreign currency. Second, Pizza Hut division and worldwide system sales include the benefit of the increase in units In the fourth quarter of 2018, related to our strategic alliance with Telepizza, same store sales and net new unit 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. No significant impact in our income statement or cash flows as a result of this accounting change. And last, please note that the fourth quarter 2019 results include a 53rd week. However, figures stated on this call will exclude the 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 10-K filing. First quarter 2020 earnings will be released on April 29, 2020 with a conference call on the same day. Now, I'd like to turn the call over to Mr. David Gibbs.

Thank you, Keith, and good morning, everyone. 2019 was a truly historic year for Young. First, we successfully completed our three-year transformation and delivered on our bold commitment. Second, we surpassed two milestones that are a testament to Yum's incredible scale as we eclipsed $50 billion in system sales and marked the opening of our 50,000th restaurant. None of this would have been possible without our unrivaled culture and talent and over 2,000 franchisees who run 98% of our restaurants globally and employ more than 1.5 million restaurant team members. Because of our journey to become more focused, franchised, and efficient, we're now in a much stronger position to accelerate growth and improve franchise unit economics over the long term. Before I begin, I want to share a heartfelt thank you to everyone within the Young family who made these results possible. I especially want to thank Greg Creed, who led Yum as our CEO for five years with his signature blend of smart heart and courage. I also want to thank Tracy Skeens, who was uniquely essential to this massive transformation. In her dual role as Chief Transformation Officer and Chief People Officer, Tracy helped shape Yum's direction, all while working to make our culture more collaborative and inclusive and getting us in the best position to expand our capabilities with new talent and strategic investments. As an example, on the talent side, in 2019, we elevated experienced YUM executives to critical global growth roles. Tony Lowings, the KFC CEO, Artie Stars, the Pizza Hut CEO, Gavin Felder, the Chief Strategy Officer, and Nikki Lawson, the Taco Bell Chief Brand Officer. We also brought in fresh thinking and capabilities from outside Yum with Chris Turner as Yum CFO, Mark King as Taco Bell CEO, Clay Johnson as Chief Digital and Technology Officer, and more recently, Shannon Hennessey as KSC Global CFO. In addition to our talent moves, we made bold strategic investments that leverage our scale. For example, our U.S. partnership with Grubhub, Pizza Hut's acquisition of Quick Order, and our growth alliance with Telepizza. And as we started 2020, we built on this momentum by announcing our plans to acquire the Habit Burger Grill, a fast, casual, trend-forward concept with tremendous growth potential. I'm proud of what we've done during this time of transformation and couldn't be more excited about where we go from here. Now I'd like to share with you a few thoughts on our future direction. One, it's clear that how we get results in today's world matters more to our customers, employees, and investors than ever before. So you'll hear us sharing more about our recipe for good that outlines our sustainability commitments on our food, planet, and people. As such, the guiding purpose for Young Brands will be to unlock potential for both growth and good. We'll remain committed to the four growth drivers and plan to deepen our execution with new strategies and tactics within each one. Two, to grow, we must deliver a consistently positive customer experience wherever we operate. Only the best brands in QSR will thrive and be relevant for the next generation of consumers. As CEO, I'm committed to elevating the experience for each of our 40 million customers every day and achieving the kind of unit economics only made possible through exceptional talent, industry-leading operations, innovative technology, and modern assets. Three, With more restaurants than any other company, we must leverage our scale and technology to create sustainable competitive advantages and growth for our franchisees. You've already seen us take steps in this direction. As previously announced, Clay and Gavin are leading a cross-brand effort that embraces disruptive innovation, harmonized platforms, advanced data analytics, and emerging technologies to transform the customer and employee experience. We'll also continue to consider acquisitions and strategic partnerships that allow us to unlock value and expand our capabilities. Four, because our unrivaled culture and talent is a huge competitive advantage, we're going to continue investing in developing the best leaders and restaurant general managers around the world. We will dial up our efforts on diversity and inclusion with a focus on gender parity and underrepresented minorities. In summary, our brand will focus on unlocking our potential with better experiences for our customer and employees, which will ultimately lead to better franchise unit economics and better growth. I'll now share our overall view of our results for Yum and a red brand update. Then Chris will share the details of our fourth quarter and 2019 results, 2020 guidance, as well as an update on bold restaurant development and unmatched franchise operating capabilities. Let's talk about 2019 results. Overall, Yum delivered a strong year with system sales growth of 8%, with 3% same-store sales growth and 4% net new unit growth. Starting with same-store sales growth, Taco Bell and KFC were standouts this year with 5% and 4% respectively. For bold restaurant development, 2019 was a record-breaking year, and I'd like to recognize the efforts of all involved and put it into context. As I previously mentioned, our global system surpassed 50,000 restaurants in 2019. We accomplished this by opening a record 2,040 net new units, which represents a 70% increase versus 2016 when we began our transformation. We opened, on average, nine gross restaurants per day in 2019 and now have an unmatched 287 brand country combinations. I believe our enhanced focus on bold restaurant development resulting from our transformation enabled us to accelerate unit growth and achieve this milestone. Now for our three red brands. KFC division finished the year strong. In the fourth quarter, they delivered system sales growth of 8% with 3% same-store sales growth and 7% net new unit growth. For the year, system sales grew 9% with 4% same-store sales growth and 7% net new unit growth. KFC International's results are truly remarkable, with strong performances across the board. India had another exceptional quarter with 12% same-store sales growth, ending the year with 10% same-store sales growth. Their momentum is attributable to always-on marketing around value innovation and expanding their digital channels. Our Middle East business unit was another top performer in Q4, with 11% same-store sales growth. In the U.S., in-store sales growth grew 1% in Q4. KFC U.S. continues to partner with Grubhub to add locations for delivery and click and collect. We now have over 2,800 locations offering delivery and 3,800 restaurants available for click and collect. In conjunction with the launch of KFC.com in October, we're excited about the operational ease this provides to our team members and customers. Moving on to the Pizza Hut division, fourth quarter system sales growth was flat, excluding the benefit of Telepizza, with a same-store sales decline of 2% and 1% net new unit growth. For the year, system sales grew 2%, excluding the benefit of Telepizza, with flat same-store sales and 1% net new unit growth. Pizza Hut US, which represents 8% of Yum's operating profit, excluding corporate and unallocated items, reported system sales and same-store sales declines of 4%, with a 2% net new unit decline in the fourth quarter. PZUS continues to be a business in transition, and for the last three years, we've made improvements in food quality, speed of service, our loyalty program, and upgrading our technology for online ordering and delivery. However, significant opportunity remains in three areas. First, more consistent execution in our customer experience across delivery and carryout. Second, ensuring we have value promotions that truly resonate with consumers and that are consistent with a long-term, profitable unit economic model. Third, in remodeling and relocating assets. We are urgently taking steps to change the trend and are working internally with our franchisees to place the brand on firmer footing to grow. To start, we've injected new leadership and talent. We've added KFC U.S. President Kevin Hochman to the Pset U.S. team as interim president. We've also leveraged Yum's deep global talent pool to add a new chief brand officer and chief marketing officer. Kevin's turnaround experience in both CPG and KFC U.S. and his proven ability to improve distinctiveness of brands and accelerate innovation make him ideally suited for this opportunity. Kevin and team are working closely in partnership with our U.S. franchisees, many of whom have the capital, capability, and commitment to continue driving this turnaround. To be clear, as we work with our franchisees through the turnaround, we have a few guiding principles. First, we are a growth company and expect that all of our brands can and should grow. Second, we remain committed to an asset-light model and disciplined spending. Third, we know the formula for success. In markets where we deliver a great customer experience with the best-tasting pizza, unbeatable value, distinctive food innovation, a best-in-class digital experience, and modern assets, we grow sales consistently. At Pizza Hut International, system sales grew 13%, including a nine-point benefit from Telepizza, with flat same-store sales growth and 4% net new unit growth in the quarter. The same-store sales gap between the dine-in channel and off-premise sales was approximately 3% this quarter, meaning our off-premise performance remained healthy at a positive 2% same-store sales growth. Europe was the main driver of the quarter's performance, delivering 3% aggregate same-store sales growth, led by strength in the UK delivery business. During the year, the UK, Brazil, Germany, Australia, and Spain were the primary contributors to positive same-store sales growth and showed significant improvement in value, the introduction of aggregators, and product innovation. Turning to Taco Bell, 2019 marked our eighth consecutive year of positive same-store sales growth, a testament to the power of the brand and excellent customer experiences delivered by our world-class franchisees. Fourth quarter system sales grew 7%, with 4% same-store sales growth and 4% net new unit growth. Taco Bell is a great example of what it means to be a red brand. The all-new toasted cheddar chalupa was introduced in the fourth quarter, delivering the innovation that Taco Bell is known for and generating a solid sales mix of 10%. We also brought back the very successful $5 nachos box and ended the year with the perennial fan favorites, the Xbox gaming promo box and rolled chicken tacos. 2019 marked the completion of the nationwide kiosk rollout to nearly 6,500 restaurants. Kiosks deliver a modern and easy interface that allows our customers to explore the menu and customize their favorite items. We continue to see meaningful checklists and growing utilizations. From kiosks to Grubhub delivery in over 5,100 restaurants to e-commerce nationwide, Taco Bell continues to leverage technology to become easier and more relevant to ultimately drive sales. Internationally, we continue to have strong sales momentum for the year, with highlights including India, Canada, Japan, and Europe. We made strides in our all-access initiatives this quarter, including piloting loyalty in the UK and adding kiosks in four markets, including the UK, Spain, Australia, and New Zealand. Before I turn it over to Chris, I did want to note that our thoughts are with everyone affected by the coronavirus situation. We're obviously following this closely, and I've been in regular contact with Joey Watt, the CEO of Young China. I know she and her entire team are doing everything they can to work with local health officials and the government to help ensure that they protect their employees as well as their customers. The Young Foundation is matching their relief efforts with donations that will provide support, medical supplies, and masks to the affected areas in China and assist frontline healthcare workers involved in fighting the epidemic in Wuhan. While Young's business model is highly diversified, such that the impact on our financial performance won't be as significant as what many companies will experience, this will certainly be a headwind for 2020. At the end of the day, this is a business built on people, and the health and safety of those people will always be our top priority. With that, I'll hand it over to our CFO, Chris Turner.