Yum! Brands, Inc.

Good day and welcome to the Yum! Brands, Inc. second quarter 2020 earnings conference call. All participants will be in a 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. As a reminder, we ask that you please limit yourself to one question. To ask a question, please press star then one. Please note this event is being recorded. I would now like to turn the conference over to Keith Signer, 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'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 the 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 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'd like to make you aware of upcoming Young 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, third quarter earnings will be released on October 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. I want to start by thanking and recognizing our employees, franchisees, and restaurant team members around the globe. They have adapted to the incredible challenges of 2020 with remarkable agility, bringing our delicious, affordable food to customers in a low-contact manner. As a result, we are well-positioned to leverage our scale and capability to generate profitable system sales growth in the new customer environment. On the foundation of our resilient, highly diversified business model, we are driving our recipes for growth and good to emerge a stronger company for all stakeholders. Our recipe for growth using our four key growth drivers, continues to guide our business strategy. So I'll start with an overall review of the second quarter and use a few examples to illustrate the power of our relevant, easy, and distinctive, or RED, brands, unmatched operating capability, and unrivaled culture and talent growth drivers. Then Chris will share more details of our Q2 results, our bold restaurant development growth driver, and their healthy liquidity positions. First, Q2 results. The quarter was significantly impacted by COVID-19, the primary driver of our 25% core operating profit decline. Overall young system sales declined 12%, with a 15% same-store sales decline offset by a 3% increase in net units year over year. The impact on our sales in each of our markets depended on the timing, severity, and duration of the outbreak, as well as our reliance on dine-in sales in the markets. Overall, our sales declines were primarily driven by temporary store closures, which peaked in early April at about 11,000 restaurants. We then experienced a consistent pace of reopening until our June 10th AK filing, when approximately 5,000 units, or 10% of our global system, remained closed. I'm excited to share that closures have now fallen to less than 2,500 units, which means roughly 95% of our system is open for business in full or limited capacity. The remaining closed stores are dispersed around the globe, with about 70% located in malls, transportation centers, airports, and the like. We're encouraged that, generally speaking, when our stores are open, customer trust and demand are high. This is true even though the majority of our dining rooms have been and remain closed, highlighting the importance of executing the off-premise occasion well and demonstrating the resilience of our business model. Our brands are becoming even more red by leveraging consumer insights to adjust operations, menu options, and marketing, and by digitally-enabled off-premise capabilities across the globe. With our focus on delivery, carryout, and digital, we have passed some tremendous milestones this year. We now have over 34,000 restaurants offering delivery around the world, representing a 13% increase year-over-year, in part driven by expanded aggregator partnerships. Our digital sales mix has increased dramatically to over 30% of system sales, a 15-point year-over-year improvement. To put that into context, during the quarter, digital sales were approximately $3.5 billion, a $1 billion step up from Q2 2019. Our brands, working in concert with our Yum! Central technology team, have shown remarkable agility and will continue to unlock sales growth over the near and long term. That's a perfect segue to our four red brands. Let's start with KFC division results. Q2 system sales declined 18% as a 21% same-store sales decline was partially offset by 6% net new unit growth. Encouragingly, Trends improved from early April troughs, fairly in line with the rate of store reopens. KFC started the quarter with 5,000 restaurants temporarily closed, peaked in mid-April with about 6,000 closures, and, following a massive effort to reopen, ended Q2 with about 95% of stores open. Our performance in open stores was primarily linked to off-premise capability within a given market. We saw consistent strength in Canada, the U.S., and Australia, and after government-mandated closures eased, we saw resiliency in Germany and the U.K. All of these markets have good drive-through coverage, strong off-premise capabilities, and robust digital foundations. Western Europe, in particular KFC France, which was hit hard early on, led the way in reopening markets where all channels and restaurants had been closed due to lockdown. The local teams took action to keep our team members and customers safe while working with government bodies to ensure that we were among the first QSRs to reopen. In the US, KFC is serving the right occasion at the right time, fulfilling families' needs for delicious meals to take home and unpack around the dinner table. The timing of our launch of KFC.com for pickup and delivery, the addition of new aggregators, and our bundled bucket meals that travel well all contributed to a fantastic quarter. We recorded the highest average sales per store in the brand's history during a week in early May, and we finished with 7% same-store sales growth for the quarter. Moving on to Pizza Hut, the division reported a Q2 system sales decline of 10%, with a 9% same-store sales decline and a 1% net new unit decline. Pizza Hut entered the quarter with over 3,500 restaurants temporarily closed due to the COVID-19 pandemic, with same-store sales growth trending in line with temporary closures. Closures then peaked in mid-April, with about 4,000 restaurants temporarily closed. By the end of Q2, about 87% of Pizza Huts were open, with Pizza Hut U.S. Express stores representing half of the remaining closures. In general, markets that operate a dine-in segment, have significant stores and malls or transport hubs, or have Express units, have been most impacted by closures and government restrictions. While the effect has been partly offset by increases in delivery and carry-out demand, the net impact globally has been headwinded. At Pizza Hut International, temporary closures peaked at approximately 24% in April. Importantly, certain markets, including Canada, Japan, and Australia, closed the quarter with positive results, though this was offset by markets with substantial dine-in and express footprints. Those markets include the U.K., much of Europe and Central America, the Middle East, and select markets in Asia. In aggregate, off-premise channels generated a positive 10% same-store sales growth and represented 80% of total sales internationally. At Pizza at U.S., we balanced value and innovation as we introduced the $9.99 large three-topping deal and premium products such as the Big Dipper and the Big Dinner Box. Same-store sales grew 5% in the second quarter, and I'm excited to share that in early May, the U.S. recorded its highest average sales week for delivery and carryout in the past eight years. Our off-premise channel generated 21% same-store sales growth when excluding the drag of closed express stores, or 16% same-store sales growth when including the drag of closed express units. During the quarter, we launched our contactless initiative by adding additional pickup and payment options for customers. Since March 2020, Pizza Hut has served close to 20 million contactless digital orders. We've also welcomed several million new and reengaged customers to our HUT Rewards loyalty program. At Taco Bell, system sales declined 6%, driven by an 8% same-store sales decline, partially offset by 4% net new unit growth. Taco Bell temporary closures peaked at 500 at the end of Q1 and had reopened 100 units by mid-April. By the end of Q2, about 97% of Taco Bell units were open. At Taco Bell U.S., we pivoted our marketing to promote group bundles, drive awareness of contactless drive-through and delivery, and thanked our fans, heroes, and communities by giving away free Doritos Locos Tacos. We coupled this with abundant value offerings such as cravings boxes and party packs and our all-new at-home taco bar, which supported record-breaking sales on Cinco de Mayo and further established Taco Bell as a destination for groups. And to adjust to widespread dining room closures, our company and franchise partners doubled down on world-class operations as Taco Bell served an additional 4.8 million cars through our drive-thrus while achieving an 18-second faster drive-thru time year over year. Taco Bell has always been an easy brand for customers to access, and now with the ability to order on the Taco Bell app and pick up through our world-class drive-thru, they are redefining the easy part of rent. During the quarter, we added over 1 million new users to our active e-commerce platforms through our mobile app and TacoBell.com. These operational improvements and increased focus on digital and delivery have made an impact in driving profitable growth for our franchisees, and we are extremely proud of our operators for making it happen. Following an eventful first full quarter as our newest brand, I'm pleased to share details about the Habit Burger Grill. With the majority of the Habit's assets being in-line or end-cap units, COVID-19 significantly impacted Habit's sales just as we were closing on the acquisition in mid-March. With over half of sales typically coming from dine-in and temporary closures running at approximately 10% of habits throughout the quarter, they faced a massive headwind. Impressively, from the April sales lows, the habit quickly turned things around by shifting focus to off-premise. They ended Q2 with an 18% same-store sales decline, mostly due to temporary closures, and recent trends for open stores are flat to slightly negative. During the quarter, the habit built customer awareness of new access options and shifted marketing to focus on family meal bundles, such as the variety meal that can feed a family for only $30. Digital ordering via mobile and kiosks represented 40% of sales during the quarter, and importantly, each month this year we have seen a steady increase in the number of app downloads. I've been incredibly impressed with the resilience of this brand, the agility of the entire Habit team, and the know-how sharing taking place between Habit and our legacy brands. None of us could have imagined how Q2 would play out when we made the decision to acquire the Habit, but I'm more confident than ever that the brand and the team will create a new long-term growth opportunity for Yum. I'd now like to spend a moment on the current state of the business. Of course, there remains incredible uncertainty in the global macro outlook owing to COVID-19 and its implications as evidenced by the different trends we see in each of our 290 brand country combinations. Due to this uncertainty, we must remain vigilant. That said, we are encouraged about our continued store reopenings, the general financial health of our global franchisee base, and our own strong liquidity and balance sheets. Just as importantly, same-store sales trends for open stores stabilized in June just a few points short of flat, and despite the majority of our dining rooms still being closed, these trends have continued into July. Finally, earlier this year, we elevated our recipe for goods to serve as our roadmap for Yum's global strategy for citizenship and sustainability. That recipe is built on the three key pillars of food, people, and planets. Those of you familiar with Yum! know we have always been a people-first company, committed to ensuring a safe, welcoming, and inclusive environment for our customers and employees. But recent tragedies across the U.S. have revealed a stark and unacceptable reality and have shown us that we must do more. To that end, at the end of June, we announced our Unlocking Opportunity Initiative with a $100 million commitment over the next five years, of which $50 million was funded in the second quarter. This initiative will promote equity and inclusion, education, and entrepreneurship for our employees, frontline restaurant teams, and communities around the world, and will serve as the cornerstone of our recipe for good going forward. I look forward to providing further updates on our progress on unlocking opportunity as we bring it to life. With that, I'll turn it over to Chris.