Yum! Brands, Inc.

Good morning and welcome to the first quarter 2021 Yum! Brands Incorporated 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. Please note this event is being recorded. I'd now like to turn the conference over to Gavin Felder, Chief Strategy Officer and Interim Head of Investor Relations. 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 cause our actual results to differ materially from these 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. All system sales results exclude the impact of foreign currency. Core operating profit growth figures exclude the impact of foreign currency and special items. All two-year same-store sales growth figures are calculated using the geometric method. For more information on our reporting calendar for each market, please visit the financial report 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. Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10Q filing. Second quarter results will be released on July 29th, 2021 with a conference call on the same day. Finally, we'll be hosting a virtual KFC Global Investor Day on Tuesday, May 25th, 2021, available via webcast on our website. Stay tuned for more details. Now, I'd like to turn the call over to Mr. David Gibbs.

Thank you, Gavin, and good morning, everyone. We've had a strong start to 2021 with solid same-store sales results on a two-year basis and a meaningful uplift in unit development. This performance is a testament to the incredible focus and dedication of our restaurant teams, franchisees, and above-store leaders around the world who are rising above the challenges presented by the pandemic to unlock new areas of growth, such as digital and off-premise, while putting the needs of our customers and local communities first. I've always believed that our success will come from leaning into our core strengths and building new capabilities that enhance our ability to grow, and the way our business has navigated through COVID-19 has only reinforced this belief. This mindset is reflected in our recipe for growth and good framework, which has successfully guided our strategy and will continue to serve as our North Star. Our recipe highlights our unique strengths as a company, notably our iconic brands, our unmatched global scale, our diversified network of highly capable and well-capitalized franchisees, and our unparalleled culture and talent. Today, we'll discuss our Q1 performance through the lens of this framework and the growth drivers that underpin it. and we'll highlight the specific areas where we've introduced new capabilities as we look toward the future. I'll cover two growth drivers, namely relevant, easy, and distinctive brands, or RED for short, and unrivaled culture and talent. Then Chris will share more details of our Q1 results, our unmatched operating capability, and bold restaurant development growth drivers, and our strong liquidity and balance sheet position. I'll start with a few first quarter highlights. In Q1, Yum! System sales grew 11%, driven by 9% same-store sales growth and the addition of 435 net new units during the quarter. Importantly, same-store sales grew 2% on a two-year basis, which includes the impact of nearly 900 or about 2% of our stores being temporarily closed due to COVID as of the end of Q1 2021. This was driven by strong sales performance in North America, the UK, Australia, and Japan, with some offset from COVID-related trading restrictions in parts of Asia and Europe. Notably, all four of our brands set a weekly per restaurant sales record in the U.S. at least once during the quarter, and I'm very encouraged that on a two-year basis, our overall same store sales in the U.S. increased 10%. Importantly, each of our brands experienced positive two-year same store sales growth on a global basis in open and operating stores during Q1. This is a great indicator for the strength and breadth of our recovery. A key focus point for our teams was the continued acceleration of our digital and technology initiatives across the globe, all geared towards providing customers with new and seamless ways to access our brands. Delivery has been a significant part of this strategy, and we now have over 39,000 restaurants offering delivery, representing a 16% increase year over year, driven by expanded aggregator partnerships and continued investment in our own branded channels. We had another record digital system sales quarter with over $5 billion, about a 45% increase over the prior year. Now let's talk about our four brands, starting with the KFC division, which accounts for approximately 48% of our divisional operating profit. Q1 system sales grew 11%, driven by 8% same-store sales growth and 4% unit growth. For the division, Q1 same-store sales were flat on a two-year basis, which includes the impact of about 1% of our stores being temporarily closed as of the end of Q1 2021. Globally, KFC's digital sales mix reached a record of 43% during the quarter, driven by the rapid expansion of delivery, click and collect, and the introduction of new channel ordering options. At KFC International, same-store sales grew 7% during the quarter. Same store sales declined 2% on a two-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q1 2021. We continue to see strength in the UK, Australia, Canada, and Japan during the quarter and saw encouraging results in the Middle East, Mexico, and Africa. Each of these markets performed well above their 2019 sales levels owing to their off-premise capabilities, digital strength, and impressive product launches like the Sharebox in Japan and the Chicken Nights promotion in Mexico. Next, at KFC US, we continued to see positive same-store sales with 14% growth in Q1. Importantly, same-store sales grew 11% on a two-year basis thanks to all the team's hard work in building additional sales channels and growing the core business, while adding hyper-relevant product innovation, such as the new chicken sandwich. Our sandwich is performing at more than twice the volumes of our prior U.S. sandwich launches, and all initial indications are that it's highly incremental. Customers are loving the product and coming back more frequently for it. In fact, as we've entered Q2, demand for the new sandwich has been so strong that coupled with general tightening in domestic chicken supply, our main challenge has been keeping up with that demand. Moving on to Pizza Hut, which accounts for approximately 17% of our divisional operating profit, the division reported Q1 system sales growth of 7%, driven by 12% same-store sales growth and a 4% unit decline. Global Q1 same-store sales declined 1% on a two-year basis, which includes the impact of about 3% of our stores being temporarily closed as of the end of Q1 2021. Overall, Pizza Hut International same-store sales grew 8%. Same-store sales declined 7% on a two-year basis, which includes the impact of 3% of our stores being temporarily closed as of the end of Q1 2021. Importantly, the off-premise channel achieved 10% same-store sales growth for the quarter. Similar to KFC, our developed markets with high off-premise capabilities, digital strength, and newsworthy products continue to perform well. Pizza Hut US had another stellar quarter, delivering 23% same-store sales growth in the off-premise channel with 16% overall same-store sales growth. Overall, same-store sales grew 8% on a two-year basis, which includes the impact of 3% of our stores being temporarily closed as of the end of Q1 2021, and was driven by a combination of compelling value with a $10 tastemaker offer and category-leading innovation with the launch of the unique Detroit-style pizza and the reboot of our iconic stuffed crust pizza. As for Taco Bell, which accounts for approximately 36% of our divisional operating profit, Q1 system sales grew 11%, driven by a 9% same-store sales growth and a 1% unit growth. For the division, Q1 same-store sales grew 10% on a two-year basis. The quarter kicked off with the return of nacho fries, this time offered in the $5 nacho fries box. We also introduced our first digital-led product launch with the $5 build your own cravings box available exclusively on the Taco Bell app or web, which drove a meaningful increase in loyalty memberships during the quarter. And finally, our newest brand, the Habit Burger Grill, delivered 13% same-store sales growth and 6% unit growth during the quarter. Q1 same-store sales grew 3% on a two-year basis, which includes the impact of about 2% of our stores that were temporarily closed as of the end of Q1 2021. We introduced our new patty melt, and our sales growth was aided by reduced government restrictions and government stimulus. Encouragingly, digital sales continued to mix above 40%, even as dining rooms reopened, and we saw a steady improvement in the dine-in channel throughout the quarter. Onto the recipe for growth, starting with red brands. Having four brands across more than 50,000 restaurants provides us with an enviable platform to understand how consumers are behaving in every corner of the world and to use that understanding to capture future growth in our sales overnight and our brands over time. In some cases, this means strengthening our ability to grow sales at a faster pace and bringing in strong, diverse tech talent. It's with this in mind that we were excited to close on two strategic acquisitions during the quarter, being Quantum Inc. and Tick Tock Technologies. Quantum is a true innovator in marketing optimization with a proven track record of adding significant value and enabling data-driven decisions to drive return on advertising dollars and sales increases. We have seen material improvements in both marketing spend efficiencies and same-store sales growth in our Pizza Hut UK off-premise and Pizza Hut Taiwan businesses as a result of leveraging their toolkit. And at the end of last year, both Taco Bell U.S. and KFC U.S. engaged Quantum services on marketing calendar and mix optimization. TikTok presents an exciting opportunity to expand access by providing frictionless ordering through text, social media, and other conversational channels in literally just a few clicks. We've deployed their platform in approximately 900 KFC, Pizza Hut, and Taco Bell restaurants across 35 countries outside of the U.S. and have been thrilled with the agility and customer obsession of the TikTok team. In fact, we have several examples of customers completing orders on the TikTok platform in under 10 seconds, a truly seamless experience. Beyond their proven capabilities, what excites me most about these acquisitions is the high-quality, culturally aligned teams we've brought into our global organization. This is a perfect segue to our unrivaled culture and talent growth driver. Given the environment we've been operating in, we've had to find new ways to connect with the people across our vast global business. One way we've done this is through virtual market visits, where we virtually walk through a restaurant and connect with team members. The leadership team and I attended four virtual market visits during the quarter in Pizza Hut Japan, KFC Asia, Taco Bell US, and Times Square, and KFC Africa. We each left those meetings energized and proud of how our brands are represented around the world and the incredible people that make it all happen. Here, I also want to highlight two key actions we are taking to bring our recipe for growth and good to life. On the equity and inclusion front in the US, we're taking tangible actions to represent the diverse communities where we operate by increasing black and Latinx employees and leaders in our corporate and restaurant management roles. As part of this effort, we're proud to partner with 110, a coalition of leading companies coming together to upskill, hire, and advance 1 million black individuals in America over the next 10 years. These actions advance our global unlocking opportunity initiative in the US, and we're looking forward to working alongside the community of companies in 110 as well as our franchisees to advance equity and opportunity. Finally, as part of our broader strategy to address climate change, Earlier this week, we announced our pledge to achieve net zero greenhouse gas emissions by 2050 with a science-based target to reduce emissions by nearly 50% across our supply chain and restaurants by 2030 in partnership with our franchisees, suppliers, and producers. This is an incredibly important issue to us, our customers, and other stakeholders, and I'm proud of our continued progress in this space. To wrap up, I'm encouraged by the momentum in our business as we execute our recipe for growth and good to set ourselves up for the next chapter of growth. Although COVID continues to impact many geographies and make our overall path to recovery uneven, I believe that with our iconic brands, world-class talent, inclusive culture, and healthy franchise system, we are poised to enter a post-COVID world even stronger. With that, Chris, over to you.

Thank you, David, and good morning, everyone. Today, I'll discuss our first quarter results, our unmatched operating capability and bold restaurant development growth drivers, and our strong liquidity and balance sheet position. To begin, let's discuss Q1. As David mentioned, overall Yum! system sales grew 11%, driven by 9% same-store sales growth and 1% unit growth. On a two-year basis, same-store sales grew 2%, which includes the negative impact of about 2% of our stores being temporarily closed due to COVID as of the end of Q1 2021. EPS excluding special items was $1.07, representing a 67% increase compared to ex-special EPS of 64 cents in Q1 2020. Core operating profit grew 33% in the first quarter. This performance is attributable to a stellar same-store sales growth in several developed markets at KFC, the combination of strong sales and restaurant margin growth at Taco Bell, and a year-over-year benefit associated with reserves for franchisee accounts receivable. I'll now provide some additional color on several items. Starting with Taco Bell, we had another impressive quarter of profitability, where company restaurant margins were 24.1%, representing a 1.7% increase over prior year. As we've mentioned on previous earnings calls, we expect these margins to return closer to historical levels later this year as check averages normalize, dining room patronage increases, and we adjust staffing levels at our restaurant as a result. During Q1, we continued to see recoveries of amounts past due at KFC International and Pizza Hut U.S. These recoveries resulted in a $6 million net benefit to operating profit related to bad debt during the quarter, representing a $34 million year-over-year tailwind to operating profit growth as we lapped $28 million of expense in Q1 2020. While we ended 2020 with $12 million of full-year bad debt expense, we had large quarterly swings last year due to COVID. As such, we expect year-over-year operating profit growth to continue to be impacted as we lap bad debt expense of $13 million in Q2 and bad debt recovery of $21 million and $8 million in Q3 and Q4, respectively. While difficult to forecast, at this point we don't expect bad debt to significantly impact our year-over-year operating profit growth on a full year basis. Most importantly, our franchisees are generally on solid financial ground despite the uncertainties caused by COVID. We recently completed the restructuring of our largest Pizza Hut U.S. franchisee, NPC, that resulted in Flynn Restaurant Group joining the Pizza Hut family. We believe our franchisees are well positioned to partner with us as we look to accelerate out of COVID. General and administrative expenses were $206 million. We still anticipate the timing of full year 2021 G&A to be back end weighted as it has been historically. And we estimate that our consolidated G&A expenses will be slightly less than $1 billion for the full year 2021. Our commitment to be an efficient growth company that leverages fixed costs and utilizes our unique scale remains unchanged, and we expect our G&A ratio to move back toward our historical target as sustained growth resumes. Interest expense was approximately $131 million, an increase of 11% compared to Q1 2020. driven by write-offs of historical debt issuance costs and other one-time financing costs associated with the Q1 refinancing. Capital expenditures, net of re-franchising proceeds, were $25 million for the quarter. As we mentioned on our last earnings call, we believe roughly $250 million in annual gross CapEx appropriately balances the inherent needs of the business with opportunities to invest in technology initiatives and strategic development of equity stores. We still anticipate at least $50 million in annual proceeds from re-franchising, which will fund the strategic equity store investments. As a reminder, for 2021, we may be slightly higher than the $250 million gross CapEx amount to catch up spend on repair, maintenance, and remodels delayed owing to COVID, as well as selective strategic development in the U.S., primarily for the Habit Burger Grill, for which re-franchising proceeds may not be fully realized this year. Now, onto our unmatched operating capability growth driver. With so much of our sales now going through off-premise channels, our operations teams have been laser focused on delivering a fast, enjoyable experience for customers. As a result, KFC US improved their drive-through speed by nearly 15 seconds in the quarter over last year. And Taco Bell US delivered their fastest average drive-through speed in eight years, while serving a staggering 17 million more cars compared to the same quarter last year. Importantly, one-third of these additional cars served were digital orders, which typically carry a higher check value, not to mention an optimized customer experience. Additionally, we continue to make tangible progress on scaling our in-house built technology platform. During the quarter, we deployed the pickup and delivery ordering solution across all KFC US restaurants, including the launch of our first-ever custom-built KFC app. Early signs are highly encouraging, and this gives us confidence as we look to further optimize and scale the platform. Now, moving on to bold restaurant development. During the first quarter, we opened 660 restaurants and closed 225, resulting in 435 net new units. Most notably, KFC delivered 4% unit growth with strength in China, India, Russia, and Thailand. At Pizza Hut, we were pleased to add 71 net new units, reflecting a positive trajectory following the COVID-related dislocations and closures of last year. We still have more work to do and there will be choppiness related to the uncertainty of COVID and our continuing transition to a more modern state, but we are encouraged by strong unit economics in many markets and our resilient global franchise base. We are also proud to announce that shortly after the quarter ended, we opened our first ever Taco Bell in Malaysia. Not only was this the 31st international market Taco Bell has entered, but it was the first market entry where all training and launch programs were conducted virtually, a real breakthrough by the amazing Taco Bell Asia team. Overall, we are pleased with the momentum at the end of 2020 and into the early part of 2021, and this increases our confidence that we can return to 4% annual unit growth sooner rather than later. In 2021, we're optimistic that we will accomplish at least 3% unit growth. Now for an update on our balance sheet and liquidity position, as well as our latest thoughts on capital structure and priorities for capital allocation. First, we ended Q1 with cash and cash equivalents of approximately $560 million, excluding restricted cash. Consolidated net leverage was 4.9 times, which returns us to our target of approximately five times. Second, we repurchased 2.6 million shares totaling $275 million at an average price per share of $106. Third, we executed a series of transactions that added resiliency to our business while balancing liquidity, flexibility, and cost. During the quarter, we amended and extended our credit facility and refinanced our term loans. We also priced a new Yum! Brands Inc. holding company bond, which closed on April 1st, subsequent quarter end. Proceeds from this new bond, which carries a coupon of 4.625% and matures in 2032, will be used to repay $1.05 billion of 5.25% restricted group notes due in 2026, which we intend to retire later in the second quarter. All combined, the transactions were leveraged neutral and, importantly, allowed us to boost liquidity, lower interest going forward, and extend maturities. As always, we'll continue to look for opportunities to further optimize our capital structure depending on market and business conditions. Lastly, our capital priorities remain unchanged. Invest in the business, maintain a healthy balance sheet, pay a competitive dividend, and return the remaining excess cash flows to shareholders via repurchases. With that, operator, we are ready to take any questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Please limit yourself to one question. Our first question comes from David Palmer from Evercore ISI. Please go ahead.

Oh, thanks. I'll try to squeeze in a two-part question. Just really about the U.S. brands for KFC and Pizza Hut. I'm particularly curious about Pizza Hut, but both of those brands have had a pretty good run during COVID, but they've also been doing some pretty good stuff on the marketing front lately. some new management and the like. So I'm wondering how you feel those brands are set up for post-COVID. Do you think they can lap near flat coming out of this as they lap some of these COVID comparisons? And I think particularly with regard to Pizza Hut, I think people are curious about the health of that system. And obviously it's a long way away is now the concerns of 2019, but franchisee profitability, if the unit closure is over, Any sort of feelings about the long-term health of that business? Thanks.

Yeah, thanks, Dave. I think you're right. You know, KFC and Pizza Hut have done a tremendous job navigating this tricky environment over the last year. But very importantly, you know, they've done a great job setting themselves up for future success. A lot of that, you know, as you mentioned, good marketing, the rollout of the KFC sandwich. I mentioned it in my prepared remarks, but it bears repeating. That has been a very successful launch. with a great product that really is the winning product in the category, and we're excited about the impact that'll have, along with secret recipe fries that rolled out in the quarter. But on Pizza Hut specifically, the comment about health is also well put. The Pizza Hut franchisees over the last year, given the success they've had, the ability to close some of the underperforming dine-in stores that we have been trying to get out of, All of those moves together have strengthened their financial condition in a very big way, and that sets them up for much better growth going forward. A big part of that is just the ownership of NPC, which we also mentioned. Greg Flynn and his organization taking over a good chunk of the Pizza Hut U.S. stores is a huge positive for the brand. They're great restaurant operators, great businessmen that has a great team underneath knows how to run restaurants as well as anybody in this country, and very excited about the impact he will have taking over those stores and improving their operations, fixing up the assets, and growing the business.

Our next question comes from John Glass from Morgan Stanley. Please go ahead.

Thanks, and good morning. It was good to hear that unit growth is now sort of within the historical range, 3% this year, perhaps on the path back to 4%. Can you just drill down a little bit, one, just by brand, how you think that plays out? Obviously you've led with KFC, but, you know, maybe there are some other opportunities within, you know, the other two brands this year. And also just thinking out over the next two to three years, historically you've led with KFC, but is there, has COVID changed the way you think, thought about the growth opportunity for the other two brands? And maybe the balance of growth is going to be different going forward than it has been historically?

Yeah, thanks a bunch. Good question on development. And as we said, we were encouraged by the momentum at the end of last year and the momentum in Q1. You know, our expectation for all of our brands is to be growing units. And, you know, that's been our history and will continue to be our expectation going forward. You know, KFC, we think, you know, has historically been strong and we want it to continue to be strong. But we have high expectations for Taco Bell, Pizza Hut, and The Habit. Common across all of them is we think strong franchisees, very strong unit economics that improve as the business rebounds from COVID. you know, continued brand love from consumers and ability to serve them on an off-premise basis. Plus, you're seeing us now integrate digital into the formats. And so, you know, post-COVID optimized formats, you know, in each of those brands. And so, that coupled with our very strong development teams, we think, you know, supports us on that trajectory back. And so we have expectations that we see strength across all of the brands going forward from a development standpoint.

The next question comes from Dennis Geiger from UBS.

Please go ahead. Great. Thanks for the question. And wondering if you could talk a little bit more about Taco Bell and some of the brand strength and the franchisee strength that you've seen in recent quarters. David, I think you talked about some of the key drivers of strength in this most recent quarter. Just curious on the go forward, some of the drivers you're most excited about, whether it's digital, the loyalty program that you touched on, how that new product pipeline looks. And just as we think about the reopening developments and dynamics going forward, some of the headwinds may be from competition reopening, but also for talk about kind of late night coming back, maybe breakfast coming back. I'm curious if you guys could speak to some of those tailwinds as well. Thank you.

Yeah, and for Taco Bell, I think there's excitement across the board for everything they've done over the last year under Mark King's leadership and the great talent that we have at the brand and with our franchise partners, one of the strongest franchise systems you'll ever find. The international development story is one that bears mentioning in terms of the opportunities we have there. We're starting to see ourselves get to scale in some markets. We always know that when we get to about 100 units in a market, that's when you really can start to unlock development, leverage marketing dollars to really create a virtuous cycle and a better unit economic play. We're starting to see that happen in a few markets around the world, and I think we're excited about the upside there. But even in the U.S., we also are leaning more into development as the unit economics look great right now. The opportunities in the U.S. real estate landscape are there, and our franchise partners are financially healthy. and eager to go after them in concert with our team and picking the right opportunities that make money for them. The progress that we've made over the last year on digital is also an important part of the Taco Bell story. We're coming out of 2020 with a great loyalty program and a lot of loyalty members. That progress was made last year as we increased our digital sales. That lays the foundation for more success going forward. We did the first digital-only promotion of the $5 Create Your Own box. It's a great example of how having that digital business increasing gives us new tools to grow sales. So I think the brand is really hitting on all cylinders. The product innovation is there. Once again, they got something out of Fry's for the quarter, and they've got all the great pipeline of stuff coming down the road. And the future for Taco Bell is incredibly bright with accelerating development growth, a strengthening brand, a great leadership team, great franchise partners.

The next question comes from David Tarantino from Baird. Please go ahead.

Hi, good morning. I wanted to come back to your outlook for unit growth. And I guess if I look at the first quarter, I think 435 net openings is the highest you've achieved in perhaps at least 10 years, according to my model. But I'm wondering if there was anything unique to the quarter that would have driven that strength. And if you can comment on how that strong start to the quarter kind of translates to your guidance of at least 3%, but not perhaps getting to that 4% run rate, that would be helpful. Thanks.

Yeah, David, good question. You know, if you look at Q1, I think a couple of things stand out. You know, we had strong gross openings, which were, you know, in particular driven by a few key markets in Asia, but general, you know, strength in openings across the board. You saw in the U.S., you know, fewer closures, and in general in the Pizza Hut global system, fewer closures than we had last year. which, as we said in the prepared remarks, we think reflects a bit of a turn there, although there's still a lot of work to be done on the asset transformation, and there's still going to be choppiness from a unit standpoint in the Pizza Hut system. And so those are kind of what drove the shape of development in the quarter. As we said, there's still a lot of uncertainty going forward. If you get outside of the U.S., the COVID situation in certain countries is still very dire and that leads to some unpredictability. That's why we're not yet ready to commit to exactly when we can get back to the 4% number, but we do have enough confidence as we look at the current pipeline to say that we think we'll be at the 3% number at least this year. But again, we've still got a fair bit of uncertainty out there given the global situation.

The next question comes from John Ivanko from JP Morgan. Please go ahead.

Hi, thank you. Chris, I think you touched on it briefly in your prepared remarks, but Ticket drove the majority of quick service comps in 2020, just speaking for the category, with Ticket being hugely positive and transactions generally being negative. Can you comment, and this is I guess for the whole team, on your thoughts of maintaining that ticket as traffic returns, or should we, by definition, be looking for a positive transaction environment, perhaps at least partially offset by a negative ticket environment? And if you could talk about maybe some experience that you've seen in markets that have been reopened the longest in terms of that ticket traffic dynamic, if there's any differences in those markets that have been opened the longest relative to national average. Thanks.

It's a good question, John, and I'll just, obviously with 290 brand country combinations, a lot of this varies by each one of those. But in general, we are seeing as markets reopen, ticket come down a little bit. But the thing that determined a lot of our success going into this was our ability to serve family meals and serve larger tickets. So the brands that had those options like KFC Buckets and Pizza Hut Meals for Sharing tended to do better. And we're not seeing that all go away. I think, you know, as you think about the things that happened during COVID, accelerating trends, which ones of those are going to be sticky? I think we expect that Ticket will come down from where it's at, but that I don't know that it's going to return to its old levels. And, you know, we think that's good. The same thing could be said for, you know, some of the digital business, the increases that we've had in digital that's going to be stickier and stay in our business, even in the U.S. as we see, you know, dining rooms reopen. We're not seeing, for example, a decline in Taco Bell's digital business, and so we're holding on to those gains. So, yeah, it's probably fair to expect Ticket to start to moderate, but I don't know that it's going to return to pre-COVID levels.

The next question comes from John Tower from Wills Fargo. Please go ahead.

Awesome. Thank you. I appreciate it. I was just hoping you guys could fill us in a little bit on the recent tech investments. I know, David, you had mentioned that Quantum has been in a couple markets so far, and TikTok, if I'm saying the name correctly, has been in about 900 stores outside of the US. So I'm curious to hear what you expect these platforms to deliver and how you expect them to spread across the globe, what sort of unlock you're expecting for sales, and maybe perhaps dig into what you're seeing in those stores where the technology has been deployed versus stores where that hasn't been the case. And if there's any incremental investment, perhaps on headcount in order to see this opportunity scale up across the globe.

Great. Great question. So we're excited about both of these acquisitions. If you think about the key areas of our technology strategy, they tie to two of those key areas, one being our e-commerce and technology platform. So, TikTok enhances that by giving us one more way, one more channel for customers to easily access our brands through channels like WhatsApp, social media, text messaging. We've had a really good success with it in the nearly 1,000 stores where we've already used TikTok, and we have high expectations for that team. to continue to bring on new markets and expand within each of the brands around the globe. We think it's a great customer experience, really easy to reorder just a few seconds for those customers. So we're excited about what it does on the platform. If you then think about another key area of our technology strategy, which is data and analytics and our ability to drive insights, Quantum fits squarely against that. It brings a new capability in-house that many of our markets around the globe have used to optimize their marketing investments. And so we're excited that they're now continuing to serve more and more of our businesses internally. Both of these, we think, are high return. They're on the smaller side, but high return acquisitions. Importantly, they create a competitive advantage, and the reason we decided to acquire them is there's also the scale economies that come from being able to apply their capabilities across the breadth of our global business.

Yeah, and just one thing to expand on the return piece. We're buying these companies in order to improve our capability and provide services to our franchisees at the lowest possible cost that are really unique proprietary capabilities that we would have. They're not designed to drive a profit for YUM. We want to provide them at the lowest cost to our franchisees. The return for YUM comes through top-line growth in our franchise units, which leads to more royalty income. We think we've really got a great model here where we do these smaller acquisitions, but we can scale them across the world. They have almost no impact on our P&L initially, and then the return comes from growing sales at units, improving franchise economics. which we all know is a virtuous cycle, which leads to more development and healthier franchisees, is really our number one goal.

Our next question comes from Brian Bittner from Oppenheimer. Please go ahead.

Thank you. Good morning. As you analyze your different regions and country combinations specifically for the KFC portfolio outside of the U.S., where are you in fact seeing store-level volumes having the biggest outperformance versus 19 levels? And on the flip side, where are you seeing the biggest underperformance versus 2019? Just so we can maybe better understand what market recoveries are needed to drive a further acceleration in this positive two-year trend that you're starting to see.

Sure. Good question, Brian. I think all of this is actually fairly intuitive. Where we're seeing ourselves successful is for the most part in developed markets like the US, Canada, Australia, the UK for KFC, where they're ahead of the curve a little bit on vaccination, keeping the virus under control. People are back trading. And where our businesses going into the pandemic had skewed more off premise to begin with. and had well-developed digital and tech capabilities. So that trend is continuing for all the markets, really. I think that's something that we're pleased with is that where we were going, which usually we're a little bit ahead in developed market versus emerging markets, is on point for this environment. So conversely, the markets that are struggling are the ones perhaps where we had skewed more dine-in going into the pandemic. and where we have maybe government action that is limiting our ability to trade. For example, some markets, I think in India, we've got to close our stores now at 3 o'clock in the afternoon. That's obviously going to have an impact on our business, so less mobility leads to less sales. But we know that those situations will work themselves hopefully out sooner rather than later. which is why I think long-term we're still very confident in the international business and returning to even stronger growth.

Our last question comes from Sarah Senatore from Bernstein. Please go ahead.

Thank you. Just a quick follow-up to an earlier question and then another one. They're both about technology. The follow-up was, I think, to John's question about tech acquisitions, but specifically could you maybe talk about, give some context in terms of maybe the success or what you've seen from previous acquisitions, I think like Quick Order a couple of years ago and just maybe how your technology strategy has or hasn't changed as you think about build versus buy. And then any color you can give on loyalty, you know, for Taco Bell, I know Pizza Hut has a loyalty program. Anything you can tell me about, you know, frequency, what that looks like when people join or average spend, you know, just as loyalty, programs become more pervasive. I'm trying to figure out if they're still having the same kind of impact on the business. Thank you.

Yeah, thanks, Sarah. I'll take the first part of your question on technology. You know, if you think about it, we do ask ourselves the question of, you know, should we build the capability in-house? Should we acquire it and bring it in-house? Or should we contract with an external provider? And, you know, we run that test and we think about gosh, we should have it in-house if it is a strategic, competitive advantage with high switching costs, then we need to have that in-house. We then assess our ability to develop it versus the speed of integrating and the opportunity to attract or find a great candidate to acquire. Obviously, our ability to develop in-house is terrific right now with Clay Johnson coming on board over a year ago, plus the strong technology teams that we have at each brand. And that's where you saw the success with the launch of our KFC U.S. e-commerce platform, which will continue to expand to other parts of the business. The TikTok and Quantum acquisitions, for the reasons we talked about earlier, we think it was the right thing given that we'd already seen the success and the impact they had had on our system to bring those in-house. And then we've got plenty of examples of where we contract with service providers where it's either a less strategic capability or the switching costs are low. So that's how we think about that. And again, as David said, we drive return from these primarily by driving system sales growth and creating better unit economics for our franchisees, which furthers development in the long run.

Yeah, and past acquisitions that we've done, like Quick Order, have really paid off, not only at being done as a pizza acquisition, but leveraging the talent and some of the IP across other brands. So this thing has really got all sorts of synergies and benefits as we make the right acquisitions. We've also done acquisitions outside of tech, Like we bought Collider, a consumer insights company, that has been enormously helpful in us navigating the marketing environment all around the world and making sure we stay connected with consumers. And, you know, Collider in particular is really excited about the acquisition we did with Quantum, which will help them come up with insights on the marketing side and then implement those insights most efficiently using Quantum's algorithms. So a lot of this stuff is going to start to create even more synergies as we put what we believe is going to be the greatest tech team in the restaurant industry together. On the loyalty side, clearly the move to digital that we're seeing with our consumer base really enables us to leverage loyalty in an even bigger way. So Pizza Hut, which has had a loyalty program for quite some time now, continues to see more and more of their business going through that loyalty program. driven by frequent users that love the program. That's why I mentioned earlier I was so excited about seeing Taco Bell launch their loyalty program. It would be hard to do when their digital mix was pretty low. Now that they have a much bigger digital mix, that's a great backdrop for us to engage with loyalty on our Taco Bell customers. And just as we would expect, we're seeing those customers coming back more frequently, excited about the program, and giving us a new channel to communicate with them, market to them, and grow the business. I guess as the last question, I'll just wrap up by saying we're all quite excited about Q1, but we know there's a lot more work to do. I think what you saw in Q1 just demonstrates the resilience of the business, how we're coming out of the pandemic and a lot of markets that are now getting to the other side of this stronger with a better foundation to grow, evidenced by the development progress we made in the quarter. But we all know this is a journey. We haven't reached the finish line. We're not doing a victory dance. But we are very excited about the future. Appreciate everybody's time today and look forward to talking to you on the next call.

This concludes today's conference. You may now disconnect.

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