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.