Yum! Brands, Inc.

Welcome to the Q1 2022 Young Brands Earnings Conference Call. My name is Ruby, and I will be your moderator for today's call. If you would like to ask a question during the presentation, please press Start, followed by 1 on your telephone keypad. I will now hand over to our host, Jody Dyer, VP of Investor Relations, to begin.

Thanks, Operator. Good morning, everyone, and thank you for joining us. On our call today are David Gibbs, our CEO, Chris Turner, our CFO, 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 that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. 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 definitions of non-GAAP financial measures and other metrics that may be used in today's call, as well as reconciliations of non-GAAP financial measures. Please note that during today's call, all system sales and operating profit results exclude the impact of foreign currency. Additionally, as it relates to our Russia business, our operating results for the first quarter continue to reflect revenues and expenses related to Russia within their historical financial statement line items and operating segments. However, we have reclassed net operating profit attributable to Russia for the month of March that had not yet been redirected to humanitarian efforts as of the end of the quarter from the operating segments in which it was earned to our corporate and unallocated segments. Such operating profit has been reflected within other income expense and reflected as a special item. David and Chris will provide additional context in their prepared remarks. 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 and our restricted group capital structure will be provided at the time of our Form 10Q filing. Second quarter earnings will be released on August 3rd, 2022 with a conference call on the same day. Finally, we'll be hosting an in-person Young Brands Investor Day on Tuesday, December 13th, 2022 at the New York Stock Exchange. Stay tuned for more details. Now, I'd like to turn the call over to Mr. David Gibbs.

Thank you, Jodi, and good morning, everyone. Before I go over our first quarter results, I'd like to begin by sharing an update on our business in Russia and Ukraine. As a company that puts people first in every decision, I'm incredibly proud that we have made the safety and well-being of all those impacted by the tragedy in Ukraine a top priority. I want to personally thank our many dedicated team members and franchisees working hard to navigate through this deadly conflict and manage our business in the most complex and challenging geopolitical environment in recent history. I'm proud of how our people in the surrounding regions have banded together and are doing everything possible to support impacted Ukrainian refugees, team members, and franchisees, some of whom have overcome incredible challenges and have reopened a number of stores to serve food in communities where it is safe. Additionally, the Yum! Brand Foundation made a donation to the Red Cross to support those affected by the crisis. We activated the Yum! Disaster Relief Fund to support Ukrainian franchise employees and are matching employee donations to organizations providing relief in Ukraine, including UNICEF, the Red Cross, the World Food Program, and the International Rescue Committee. We previously announced the suspension of all investment and restaurant development efforts in Russia, as well as operations of company-owned KFC restaurants, and that we are finalizing an agreement with our Pizza Hut master franchisee to suspend all restaurant operations. In addition to these actions, we have begun a process aimed at transferring ownership to local operators while, in the interim, we continue to redirect any profits from Russia operations to humanitarian aid. This is not a decision we take lightly, and I know that it will be a complicated process to execute these transactions. We will update you on this process during our second quarter earnings call. Chris will provide more details around the financial impact from Russia on the quarter. I'll now discuss our first quarter results, which illustrate the resiliency of our highly franchised diversified growth model. Our first quarter system sales growth of 8% driven by both unit development and same-store sales growth, is a testament to our iconic brands and the unmatched operating capabilities of our world-class franchise partners. We set a first-quarter development record, opening nearly 1,000 growth units supported by positive unit growth at each of our brands. Our continued same-store sales momentum was fueled by our brands executing our recipe for growth strategy by providing relevant value, access via new channels, distinctive products, and a strong brand voice, all supported by our digital and delivery capabilities. Our digital channels continue to accelerate with digital sales of approximately $6 billion, a new first quarter record reflecting an increase of 15% year over year. Importantly, we set a new digital mix record, now exceeding 40%. In this complex and highly inflationary operating environment, we and our franchisees remain focused on maintaining long-term profitability by leveraging our scale and strategic pricing actions, while still offering our customers convenience and value. The many competitive advantages of our unrivaled talent, our sophisticated franchise system, and the power of our business model give me great confidence that we are well prepared to navigate these complexities and deliver robust global growth. Let me share a few global trends from the quarter. As Young China shared on its first quarter earnings call last night, COVID-related lockdowns impacted restaurant operations and depressed sales in that market, temporarily delaying an eventual recovery. However, our results outside of China remain strong. In fact, excluding China, both our KFC division and Pizza International same-store sales were up 10%, which would result in consolidated young same-store sales, excluding China, of 6% for the quarter. We're pleased with the continued momentum in our developed markets as they left strong results from last year, and we're excited about the continued resurgence of emerging markets with same-store sales, excluding China, of positive 18% for the quarter. We continue to be encouraged by the global consumer recovery underpinned by returning consumer mobility, creating a tailwind for our on-premise dining while we sustain our off-premise business. Next, I'll discuss two of the four recipes for growth drivers, our relevant, easy, and distinctive brands, or REDD for short, and our unrivaled culture and talent. Then I'll discuss the progress we've made on our recipe for growth. Turning to our first growth pillar, our relevant, easy, and distinctive brand. Starting with the KFC division, which represents 51% of our operating profit, first quarter system sales grew 9%, driven by 8% unit growth and 3% same-store sales growth. To illustrate the strength of the KFC brand around the world, I thought I'd highlight a few markets that showed meaningful improvement in the quarter, specifically the Middle East, Latin America, and Africa. Our Middle East market delivered 40% system sales growth fueled by robust transaction growth. Our marketing team led with a healthy balance of new products with the launch of the Messy Burger, as well as innovative value-focused flavor items such as the Twister Blades. These items drove both value perception and new customer acquisition. Additionally, the team's focus on meeting the needs of our customers through digital and off-premise channel growth while the dine-in business bounces back fueled our strong results. Latin America is another standout market. This quarter's system sales grew 34% thanks to our team hitting on all fronts. All countries in the market deployed a balanced marketing calendar focused on value to drive velocity in transactions while taste campaigns continued to build brand strength. This came to light for consumers in January with the Genius Menu value ladder that's helping recover the individual occasion. In March, the Latin American market launched the Kentucky Fried Chicken Sandwich for the first time, which drove over 10% growth in the sandwich category. Another market worth highlighting is our Africa business, which has been incredibly resilient as system sales grew 25%. Results were fueled by a continued traffic recovery, leading to transaction growth ahead of pre-COVID levels. A sign our value-driven strategy that offers accessible price points resonated well with customers. Finally, in the U.S., our KFC team is working hard to maximize convenience for the customer and focusing marketing efforts on creating greater awareness of our off-premise channels, including quick pickup services and our white-label delivery offering. The incremental sales layers we've built over the past two years, including our digital ordering channels and the chicken sandwich platform, contributed to top-line growth this quarter in the face of a difficult operating environment. Additionally, we offered beyond fried chicken in the quarter, which elevated the brand and boosted relevance, resulting in more media impressions than any other product launch in the brand's history. A consistent theme across each of these four markets is a continued growth of digital transactions and the ability to execute an omni-channel strategy. Moving to the Taco Bell division, which represents 32% of our operating profit, first quarter system sales grew 8%, driven by 5% unit growth and 5% same-store sales growth. Taco Bell U.S. system sales grew 7%, driven by 2% unit growth and 5% sales growth. I thought I'd start by celebrating Taco Bell's 60th anniversary as a brand. Given the brand's role as a culture leader in the industry, it's easy to forget its experience and heritage, all of which makes us even more confident in the brand's ability to navigate any economic environment. Taco Bell is executing on its strategy to inspire and enable the world to live MAS by remaining relevant, easy, and distinctive to its customers. On the relevance front, Taco Bell continues to champion customer value with new offerings to meet all occasions, including the introduction of $2 burritos on the new Cravings Value menu, adding to Taco Bell's existing $1 menu offering. The combination of Taco Bell's new cravings value menu with its box and combo offerings positioned Taco Bell well to serve the needs of all customers. Beyond value, Taco Bell was actively marketing craveable, distinctive foods from its limited-time crispy chicken wings to the return of our fan-favorite nacho fries. Additionally, the return to the Super Bowl with Doja Cat marked a distinctive cultural moment in the quarter. We're building on this cultural moment with the long-anticipated and much-celebrated upcoming return of the Mexican pizza, which Doja Cat announced in April. Taco Bell International system sales grew 37%, driven by 26% unit growth and 12% same-store sales growth. We continue to build brand momentum in multiple markets, including the UK, Spain, and India. Our new strategy to rescale in a few key markets has driven brand awareness, thereby improving new unit returns that lead to accelerated growth. Next, the Pizza Hut division, which accounts for 18% of our operating profit, saw first quarter system sales grow 3%, driven by 5% unit growth and flat same-store sales growth. At Pizza Hut International, which represents 11% of our operating profit, system sales grew 10%, underpinned by 7% unit growth and 5% same-store sales growth. We opened 283 gross units, setting a Q1 record. With further easing in COVID restrictions, we saw strong contributions from India and Latin America, where system sales were up 44% and 18% respectively. At Pizza Hut US, which represents 7% of our operating profit, system sales declined 6% for the quarter, attributable to a 6% decline in same-store sales and flat unit growth. While consumer demand remains strong, sales softness in the quarter stems from our delivery channel where capacity constraints limited our ability to meet demand. This was driven by staffing challenges, mainly from delivery driver shortages that have been felt across the industry. The team is prioritizing restaurant operations, including a focus on improving staffing levels, restoring operating hours, increasing online ordering availability, and more effectively leveraging the use of our overflow call centers. Additionally, in early Q2, we completed the integration of delivery as a service into our point-of-sale system. This is leading to accelerated system adoption, allowing us to leverage third-party aggregators to augment our own delivery drivers. Another action item we're taking is expanding customer access to the Pizza Hut brand via aggregator marketplaces. We are excited about the potential incremental growth from aggregator marketplaces based on outperformance we're seeing from existing franchisees using this channel. Lastly, at the Habit Burger Grill, first quarter system sales grew 17%, driven by 13% unit growth and 3% same-store sales growth. To streamline restaurant operations for team members this quarter, we promoted operationally easy-to-execute customer favorites such as our Patty Melt and the Santa Barbara Char Burger. We continued to lean into digital-only promotions and saw a strong response to our delivery and app-only campaigns in the quarter that ultimately drove an increase in app downloads and active app users. Even as consumer mobility improved in the first quarter, our digital sales across multiple channels increased sequentially, continuing to demonstrate the stickiness of these ordering options. Moving on to our unrivaled culture and talent growth track, We kicked off the celebration of our 25th year as a publicly traded company with several powerful forums that galvanized our top talent around engagement and development. For the first time in five years, we brought our top 250 leaders from around the world together for our Global Leadership Summit. Our technology leaders at the summit made up the largest functional group, which speaks to the investments we've made in differentiated technology capabilities and growth-oriented functions. We also showcase the progress our brands have made putting our recipe for good priorities at the center of our future growth, not only with less carbon and less packaging and waste, but also by making equity and inclusion come alive across every aspect of our business, from our talent to our brand marketing to our suppliers and franchisees. Additionally, We were proud to take many of our aspiring leaders to the Women's Food Service Forum, where our Chief Operating Officer and Chief People Officer Tracy Skeens serves as chair. It was wonderful to see Yum so prominently represented in a forum dedicated to growing women in our industry, something truly important to us as we're increasing the number of women in senior leadership globally and are on track to achieve gender parity in leadership by 2025. Finally, a group of our diverse leaders gathered in Washington, D.C. to discuss how we inspire and advance equity and inclusion of belonging across all levels of our organization. When it comes to our recipe for good, we invest in critical work that's focused on our three priority areas of people, food, and planning. Just last month, and as part of our larger climate strategy, Yum! joined the Supplier Leadership on Climate Transition Global Consortium, which was created to accelerate climate action throughout supply chains. Our climate work is starting to take shape in markets such as KFC UK, where they have partnered with the University of Liverpool to develop a roadmap to achieve net zero carbon and zero waste. To wrap up, this continues to be an incredibly challenging operating environment, but my confidence in our future remains high given the resilience of our iconic brands across our global diversified portfolio. Our unmatched global scale provides us unique competitive advantages, including our sophisticated supply chains with cross-brand purchasing power, strong marketing and consumer insights, expanding digital and technology capabilities, and our capable, committed, and well-capitalized franchisees that are willing to invest in the long-term growth of the business. This quarter's results continue to demonstrate the power and sustainability of our business model while we continue to deliver lasting value for our stakeholders for years to come. With that, Chris, over to you.