Yum! Brands, Inc.

Good day and welcome to the Yum! Brands 2020 First Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. We ask that analysts please limit themselves to one question to allow more people the opportunity to ask. Please note, today's event is being recorded. I would now like to turn the conference over to Keith Stegner, Vice President, Investor Relations, M&A, and Treasurer. 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 would 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 those statements. We're going to do our best to provide our current thinking about the impact of the COVID-19 pandemic on our business. But obviously, this situation is completely unprecedented and evolving, so any forward-looking remarks should be considered in light of the uncertainty regarding the severity and duration of the pandemic and the variables that will be impacted as a result. All forward-looking statements are made only as of the date of this announcement 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 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. First, all system sales results exclude the impact of foreign currency. Second, core operating profit growth figures exclude the impact of foreign currency and special items. 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. 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 would like to make you aware of upcoming Yum! Investor events and the following. First, disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10Q filing. Second, second quarter earnings will be released on July 30, 2020, with the conference call on the same day. Now, I'd like to turn the call over to David Gibbs.

Thank you, Keith, and good morning, everyone. Before we begin, I'd like to take a moment to acknowledge the unprecedented challenges that we're all experiencing and say a heartfelt thank you to our team members and franchisees around the world. It's been amazing to see our entire system band together and take action to confront these challenges with unbelievable speed. And while many of us are working to play our part, the brave healthcare workers on the front lines have the most critical roles and our positive thoughts are with them and everyone affected by COVID-19. Our goal today is to be transparent and give you timely information about the state of our business. I'll start with an overall review of first quarter and the current state of the business and use a few examples to illustrate the power of our unrivaled culture and talent and unmatched operating capabilities. I'll also highlight how our brands are adapting the REDS framework to be relevant, easy, and distinctive in this environment. Then Chris will share more details of our Q1 results and current state. how we're adjusting our business model and supporting franchisees, and our healthy liquidity position. First, Q1 results. We were encouraged by our momentum early in the quarter, driven by the underlying strength of our brand. However, as we signaled in our 8K on March 24th, the quarter was heavily impacted by COVID-19, which was the primary reason core operating profit declined 6%. Overall, young system sales declined 3% as our same-store sales decline of 7% was partially offset by 4% net new unit growth. The impact on our sales in each market has depended upon the timing, severity, and duration of the outbreak, as well as each market's reliance on diamond sales. Importantly, we have seen early signs of recovery in markets that were first impacted by COVID-19 and stabilization in others. As one example, at the time of our AHA filing, approximately 7,000 of our global stores were completely closed, driven largely by government shutdown. As various stores closed and reopened given changing mandates, this figure increased to about 11,000. Since then, stores have been slowly and consistently reopening, with approximately 1,000 reopens from the trough. Chris will talk more about recent sales trends in a few minutes. Since the onset of this pandemic, the safety and support of our employees, restaurant team members, customers, and franchisees has been our top priority. First, we moved quickly to reinforce and strengthen our already stringent protocols emphasizing hygiene, cleaning, and sanitation. Next, we leveraged the best practices of contactless delivery and carryout pioneered by Yum! China, which accelerated our execution of off-premise services. Simultaneously, we moved to suspend our dining room operations in many markets. Our brands also continue to expand protective measures for frontline restaurant team members, including protective facial coverings, increased usage of single-use disposable gloves, temperature checks, and physical distancing measures where possible. We will continue refining our practices based on consumer feedback and the latest public health and government guidance. At our 1,200 company-owned restaurants around the world, we are paying scheduled hours to team members who are required to stay at home due to COVID-19. Recognizing the vital role our restaurant general managers continue to play in these 1,200 stores, we have provided $1,000 one-time bonuses to our RGMs in addition to committing to pay their second quarter bonuses even if their restaurant sales performance would not normally qualify. Also, in June, we will pay one-time bonuses to the majority of team members working in our 1,200 company-owned restaurants. Our franchisees are also taking steps to increase support of restaurant team members during this critical time. Finally, we created a Global Employee Medical Relief Fund to provide financial support for restaurant employees at both company- and franchise-owned restaurants who are diagnosed with or who are caring for someone diagnosed with COVID-19. I'd also like to share some of the steps we're taking to help our franchisees bridge to the other side of this crisis. As a 98% franchise system, we're a business comprised of many independent and small businesses and entrepreneurs, and our franchisees are our lifeline. Going into this crisis, we reassured our franchisees we would do everything in our power within the constraints we are all facing to help them and their team. We set up a global franchise health and COVID-19 support team chaired by Chris Turner and our general counsel, Scott Catlett, to help our franchise partners navigate business continuity and assist them with access to all available sources of economic support, including but not limited to young provided sources. To help our franchise partners, we are providing assistance to those who are in good standing and need more access to capital, including grace periods for certain near-term payments and deferring certain asset obligations, which Chris will talk more about. Now moving on to our four red brands. Each brand has listened intently to customer needs and quickly pivoted to adjust in response to the crisis. We've partnered with our entire global franchise system on a shared mission to provide affordable, convenient food in a safe, low-contact environment with drive-through curbside carryout, contactless delivery, and mobile payments, all enabled by our digital and technology capability. In many ways, COVID-19 is accelerating trends we were already addressing in our business. Let's start with KFC division results. The division reported a Q1 system sales decline of 2%, as an 8% same-store sales decline was partially offset by 6% net new unit growth. Given COVID-19 impact details were already provided by Young China on their earnings call, Let's take a minute to walk through the KFC global business, excluding China. Outside of China, we had great momentum in the beginning of the quarter with 6% same-store sales growth in January and 4% same-store sales growth in February. In particular, we want to highlight the UK and the Middle East for having a very strong start to the year. As COVID-19 restrictions became more prevalent around the world in March, the full quarter ended down 2% for the KFC division, excluding China. As part of our COVID-19 pivot, contactless services are now available in 90% of KFC markets, and we are doubling down on digital and expanding delivery globally. Digital makes increase through Q1, driven by delivery and click and collect, with particular strength in Thailand and Australia. If current trends sustain, KFC globally could end the year with more than a quarter of its sales through digital channels. KFC U.S. is a perfect example of how our off-premise and digital capabilities, along with family-friendly affordable meal options, are competitive advantages in the current environment. KFC U.S. has made major strides on staying red, by offering multiple variations of family-style meals that customers can customize. We now have a $30 fill-up offer, which includes 12 tenders as an add-on to the $20 fill-up. Truly incredible value, with enough food to feed a family for multiple meals in some cases. We've seen a change in how people are accessing buckets of original recipe, with digital sales increasing to approximately 10% today. This is up from low single digits just a month ago. And importantly, about 40% of digital sales are going through KFC.com, which launched late last year. Moving on to the Pizza Hut division, system sales declined 9%, with a same-store sales decline of 11% and flat net new unit growth. Excluding China, Pizza Hut division same-store sales were down 5% in Q1. Globally, Pizza Hut has seen a mass shift in brand messaging, focusing on contactless services, food safety, team member safety, and giving back to the community. In partnership with our franchisees, we were able to quickly develop appropriate protocols and training materials to support a rollout of contactless delivery, carryout, and curbside pickup, now available in over 90 countries. During the first quarter at Pizza Hut U.S., we pivoted toward more targeted and higher-margin QSR value constructs, and leaned into core products while offering limited-time promotional value on premium products such as our specialty meatlovers pizza and the Big Dipper. We are now starting to see the benefits from the marketing and innovation changes led by Kevin Hockman, who is serving as Interim Pizza Hut President, and the early returns are reasons for increased optimism about the P-START brand's ability to succeed in a world where off-premise and contactless are more important than ever. Recent gains in off-premise have helped offset the impact of closing our dining rooms and the vast majority of our express units. Express represented 5% of our overall system sales in 2019. At P-START International, same-store sales declined 4%, excluding China. Our heavy delivery and carryout-focused markets that have continued to be able to trade without significant restrictions have typically fared well through the crisis thus far. However, many countries across Europe, Latin America, and the Middle East have been significantly impacted by COVID-19-related closures and operating restrictions. While some of the dine-in declines have been offset by an increase in delivery and carry-out demand, such as in the U.K., the net impact has been a headwind. Historically, for all of Pizza Hut International, off-premise sales have been 50% of sales. And this quarter, off-premise sales increased to 70%. To put this into context, our off-premise channel generated a positive 12% same-store sales growth in Q1. And in certain Asia markets, Japan, Taiwan, and Hong Kong in particular, we saw off-premise sales growth which more than offset diamond declines to deliver positive overall same-store sales during the quarter. Turning to Taco Bell, Q1 system sales grew 4% with 1% same-store sales growth. and 4% net new unit growth. Importantly, excluding the last two weeks of the quarter, same-store sales growth in the U.S. was trending toward an impressive 6%. The year started with a value offering at a power price point with the $1 double-stack taco. This was followed by Buffalo Chicken Fries, a very successful program, with total sales mix above 9%. Like all of our brands, Taco Bell responded quickly across all fronts to adapt to COVID-19. Taco Bell advertising is highlighting off-premise options and offering free delivery on orders over $12 through Grubhub. In the U.S., delivery and drive-thru sales pre-COVID represented about 75% of sales. Now, this is nearly 100% of Taco Bell sales, with digital representing approximately 10%. We've also maintained our below four-minute drive-thru times while simultaneously achieving an all-time low in customer dissatisfaction. This is remarkable considering how quickly the landscape has changed. Finally, our Taco Bell restaurants have the option to pause offering breakfast and adjust hours of operation as appropriate to best optimize the business model. Also during the first quarter, we completed our acquisition of the Habit Burger Grill. We knew all along that Russ Bendell and the whole Habit team were very strong operators, and we've already seen this in action. In fact, With just 50 drive-thru units, the Habit team adapted quickly to the new environment by rolling out many different order modes for carry-outs such as parking order, pop-up drive-thrus, and outdoor self-order kiosks. Additionally, Habit's digital marketing shifted to focus on value and family meal bundles accessible through carryout and delivery. Combined, the operational and marketing adjustments have fueled our growth in digital ordering, which is now about 40% of sales, up from 10% versus pre-COVID-19 levels. We couldn't be more excited about what the future holds for The Habit and believe our acquisition of this trend-forward brand will prove to be a long-term win. Before I pass it over to Chris, I want to offer a few thoughts on Yum's position as we contemplate the future and move toward a new normal. As I see it, we have four distinct advantages. First, our unrivaled culture and talent. Our brand builders and operators at Yum are partnering in a way and at a pace we've never seen before. I think urgently on solutions that address the changing needs of our consumers, employees, and franchisees. Second... Our iconic brands, each of which have endured many challenges for over half a century, and will recover from this challenge and become even more relevant, easy, and distinctive as a result. Our brands consistently stand for value, convenience, and normalcy, all of which are highly sought out in these uncertain times and beyond. Third, our business model. Our diversification across 290-plus brand-country combinations enables us to withstand sustained adversities. Fourth, and finally, our strength in the off-premise segment will position us well for recovery and growth. COVID-19 is a stark reminder of just how globally connected we all are. By working together, we can limit the spread of COVID-19 and support our front lines and communities while doing our part to offer convenient, affordable food in a safe environment.