Yum! Brands, Inc.

Hello everybody and welcome to today's Yum! Yum! Brands Inc 2022 third quarter earnings call. My name is Drew and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. If you change your mind, please press star followed by 2. We ask that you only ask one question on today's call. I'm now going to hand over to Gavin Fielder, Chief Strategy Officer and Interim Head of Investor Relations to begin. Please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us. As a reminder, I will be covering for Jodi Dyer while she is out on maternity leave. 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 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 on today's call, as well as reconciliations of non-GAAP financial measures. Please note that during today's call, all our exit from Russia. As a reminder, as of the beginning of the second quarter, we elected to remove the Russia business from key performance metrics. This negatively impacted our third quarter unit growth by two percentage points and our system sales growth by three percentage points. Additionally, these units were removed from our same-store sales calculator We continue to include Russia in gap measures for KFC, including royalty revenue and expenses to support the Russia business and expenses incurred relating to the transfer of ownership of the business. As a result of our decision to exit our Russia business, we have reclassed net operating profits from the operating segments subsequent to the start of the conflict to corporate and unallocated and reflected as a special item within the other income and expense line. 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 questions, 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 Young Investor events and following. Disclosures pertaining to outstanding debt in our restricted We will be hosting an investor day in person on Tuesday, December 13th, 2022 at the New York Stock Exchange. The event will also be webcast via our website at investors.yam.com. Fourth quarter earnings will be released on February 8th, 2023 with a conference call on the same day. Now, I'd like to turn the call over to David Gibbs.

Thank you, Gavin, and good morning, everyone. Our strong top line momentum this quarter highlights clear demand for our iconic brands. We delivered 10% system sales growth, underpinned by 5% same store sales growth, and 6% unit growth. While the broader macro environment evolves, our brands continue to thrive by being distinctive, creating excitement for consumers, and by delivering exceptional value and convenience. The investments we have made in areas such as consumer insights, marketing analytics, and new technology platforms allow us to act with taste and confidence to meet the needs of consumers around the world. I'm particularly thrilled about the performance of the KFC and Taco Bell divisions that were both standout performers this quarter. KFC did an excellent job in driving transaction growth through its omni-channel approach, leading to a sequential improvement in comps from the prior quarter. Taco Bell is winning thanks to its ability to generate and amplify standout moments in culture and translate the resulting top-line growth into impressive restaurant-level margin. I'm also excited to share that we opened a total of 979 gross units across 74 countries, proof that our development engine is powerful and diversified. As these results show, our committed and well-capitalized franchise partners are seizing opportunities to invest in the growth of our brands for the long term. Next, I want to provide an update on our rush events. As Gavin mentioned, we have a signed purchase agreement to transfer ownership of our Russian KFC restaurants, operating system, and master franchise rights to an existing KFC Russia franchisee. Following the completion of the transaction, we will have ceased our corporate presence in Russia. I want to say that I'm incredibly proud of how our local teams have managed through this extremely difficult time and prioritized the safety of our people in the region. Our number one priority is our people, and they will always be at the center of every decision we make. Now we'll talk about two of our growth drivers, our relevant, easy, and distinctive brands, or RED for short, and our unrivaled culture and talent. That will provide an update on our recipe for good. Chris will share the details of our third quarter financial results before discussing our bold restaurant development and unmatched operating capabilities growth drivers. First, I'll discuss our RED brands. Beginning with the KFC division, which accounts for 51% of our operating costs. System sales grew 12%, underpinned by 7% same-store sales growth and 7% unit growth. As these results prove, this business can perform well in a multitude of environments, even as certain pockets of its local portfolio experience heightened macro pressures. At KFC's international business, which represents 46% of our operating profit, our system sales grew 14%, driven by an 8% increase in same-store sales. This represents a significant acceleration from the 1% sector sales growth in the second quarter. We saw notable strength in the Middle East, India, and Africa, thanks to momentum across our digital channels and a focus on operations and value. Our Middle East market is truly on fire, where system sales grew an impressive 46% with strength across all channels, including a ramp up in the use of kiosks and click and collect. Our India market saw system sales grow 45% during the quarter, with customers enjoying the convenience-driven seven-minute express takeaway guarantee. In Africa, where system sales grew 31%, the team is focused on providing an easy and convenient digital experience for consumers. They've done an outstanding job rebranding their click and collect channel, as well as rolling out kiosks across the market to drive sales. underpinned by some talent-sharing offers like the all-in-one feast. At KFC U.S., we brought back our famous $5 mac and cheese bowls as a value-oriented item this quarter. The reboot of this much-loved product helps drive a positive 2% same-store sales count. Additionally, for a limited time, we launched a $6 two-piece drum and thigh combo, which has driven positive results in a meaningful sequential improvement in transactions. Moving on to our Taco Bell division, which represents 34% of our operating profit. We saw extremely strong momentum with system sales growing 9%, led by 6% same-store sales growth and 5% unit growth. At Taco Bell U.S., system sales grew 8% for the quarter, underpinned by 7% same-store sales growth and 2% unit growth. The brand is bringing to life its one-of-a-kind menu through creative innovation in ways that only Taco Bell can. This was most evident with the team adding products to its $2 cravings menu, such as the cheesy double beef burrito, while innovating with premium offers like the grilled cheese burrito. Taco Bell is a brand that is truly relevant, easy, and distinctive, with a unique ability to stand for value in the current economic environment, yet have a broad enough range to appeal to consumers across every demographic. As we enter the fourth quarter, we're even more excited about the momentum in Taco Bell U.S. with the relaunch of the Mexican pizza, which occurred in mid-September. At Taco Bell International, system sales grew 26%, driven by 30% unit growth and 5% same-store sales growth. In the third quarter, five markets delivered double-digit system sales growth, marking another milestone in Taco Bell's international expansion journey. Here to date, we've opened 111 net new units, almost double the number opened at this point last year. We're driving scale in key markets, helping our franchisees leverage their size to optimize marketing spend, expand development capabilities, and gain local sourcing efficiency. Next, at the Pizza Hut division, which accounts for 15% of our operating profit, our system sales grew 5%, led by 5% unit growth and 1% same-store sales growth. At Pizza Hut International, which accounts for 8% of our operating profit, system sales grew 6%, underpinned by 8% unit growth and 2% same-store sales growth. Across our markets, we are focused on finding ways to expand our reach and become a more everyday brand. For example, as a leading everyday value offering, the Pizza Hut India team launched a fun flavor pizza costing roughly $1.00. More broadly, the MyBox value platform is proving to be a key traffic driver through innovation and giving customers the option to customize with new entrees and side items. The platform helps us lean in on the individual meal and lunch occasions, and is now live in over 50 countries. I'm also pleased to say that our emerging markets are seeing a recovery in traffic and demand as we lap the impact of COVID. Pizza US, which accounts for 7% of our operating profits, saw system sales growth 2% driven by 1% same-store sales growth. A key focus for this business has been to provide our customers with the ability to access our brands wherever they are. As part of this initiative, we continue to partner with third-party aggregators and integrate them into our POS systems, with 90% of our system using at least one third-party marketplace. In addition, we are working to ensure we have the right value offerings to meet consumer demand and maintain franchisee profitability. This effort led to the introduction of items such as the $6.99 medium one-topping pairs deal and the return of the big dinner box as an abundant family value offer. Lastly, at the Habit Burger Grill, same-store sales trends on a three-year basis have sequentially improved since the second quarter. Additionally, we continue to see consumers download our mobile app, leading to a 10% increase in app downloads since last quarter. Digital sales at The Habit now account for 33% of mix. The team is making good progress, growing new sales channels, and forming direct relationships with our customers. Moving on to our unrivaled culture and talent growth drive. As we've mentioned on previous calls, we've been celebrating a 25th anniversary as a publicly traded company in various forums throughout this year. I'd like to acknowledge the important role our unique people-first culture and world-class talent have played in our success over the last 25 years. Our culture, which is focused on recognition and collaboration, is a key differentiator across our portfolio of iconic brands. It continues to drive retention and recruitment of amazing leaders who are developing others, growing their careers, and ensuring the continued strong performance and success of our brand. I'm proud of Young's deep bench of outstanding leaders and how our commitment to growing our people from within has driven a healthy increase in promotions and new opportunities for our team. Our culture continues to attract top external talent as well. We recently welcomed former Mars Inc. Executive Allison Park to our global leadership team as Young's Chief Corporate Affairs Officer, overseeing communications and public policy, as well as our ESG strategy, an area of increased importance as we continue driving our recipe for good. At Pizza Hut, we welcomed former Starbucks Executive Shannon Garcia as the brand's Global Chief Operating and Transformation Officer, a role that will evolve the ways in which the brand works with its markets to add value and operate with a digital-first mindset. These are just two examples of the incredible talent that our culture enables us to attract from outside and within our industry. When it comes to our recipe for good, we continue to invest in critical work that's focused on our three priority areas of people, food, and planet. I'm proud of our commitments and the progress we're making on the execution of our ESG agenda. For example, when it comes to our climate efforts, we've moved Yum's U.S. offices as well as all of our company-owned restaurants to renewable electricity. We're now conducting a global study on renewable energy markets to identify low-carbon solutions at our restaurants worldwide. And in August, P-STEP U.S. announced an exciting partnership with Dairy Farmers of America on an innovative farm-level sustainability project to provide participating farmers with the technology and data needed to help reduce greenhouse gas emissions. With iconic brands and unmatched scale, I truly believe that we're in a unique position to make a significant impact in the areas we are prioritizing. To wrap up, I'm excited about the momentum in the business that we demonstrated this quarter. The power and resilience of our brands was clear as we continue to prove we can perform well in any environment. With our diversified global scale, world-class franchise partners, and unmatched operating capabilities, I am more confident than ever in the future success of our business. With that, Chris, over to you.

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our bold restaurant development, and unmatched operating capability growth drivers, followed by our capital strategy. I'll begin with our third quarter financial results. System sales grew 10%, with product-based strength evident across our portfolio. Same-store sales grew 5%, while units grew 6%. Core operating profit grew 8%, which includes a three-point headwind from the removal of Russia profits this year. Ex-special general and administrative expenses came in at $259 million. tracking in line with our expectations for $1.1 billion of G&A expense for fiscal 2022. Impressively, our Taco Bell store-level margins were 24%, trending above third quarter last year and above pre-COVID levels. With respect to reported operating profit, FX had a negative $39 million impact, and we now expect a full year FX headwind of approximately $100 million. Third quarter, EPS, excluding special items, was $1.09, an 11% decrease versus the prior year. In addition to a 3% point impact from foregone operating profits in Russia, EPS growth was also negatively impacted by 9% points from the aforementioned FX, 9% points owing to a higher tax rate and 6 percentage points from lower year-over-year unrealized gains associated with our investment in Debiani. Our ex-special tax rate this quarter was higher than usual at just under 27%, largely due to adjustments recorded in the quarter associated with prior year taxes. Given these adjustments, we now expect our full-year tax rate to land between 23% and 24%. Given the sustained strength of our global business, we continue to expect to grow core operating profit in the mid-single-digit range for the full year. As we mentioned on the past two quarterly calls, were it not for the loss of Russian profits, we would expect core operating profit growth to be high single digits this year, in line with our long-term growth algorithm. Now, let me share some more detail on unit growth and our bold restaurant development growth driver. This quarter, we opened 979 gross new units with encouraging momentum across our brand portfolio. At KSC, we opened 485 gross new units with China, India, the Middle East, and Thailand leading the charge. Our Pizza Hut international division saw incredible development progress this quarter. opening 344 gross new units, setting a third quarter development record. This puts Pizza Hut International's year-to-date gross openings at 879 units, which is 280 units ahead of this time last year. China, India, and Turkey led Pizza Hut development, with each market adding more than 30 gross new units. The Taco Bell division opened 98 gross new units this quarter, led by strong international developments, achieving a Q3 record of over 50 gross new units. For Taco Bell International, I'm excited to share that this quarter, both the India and UK markets joined Spain in the ranks of countries that now exceed 100 units. While Taco Bell's U.S. development remains robust, we expect international developments to lead Taco Bell's unit growth this year. Despite the uneven macro pressures across our markets, our development remains strong as our franchisees use market disruptions as opportunities to grow. We are partnering closely with our franchisees to navigate challenges in the supply chain and higher construction costs. We are leveraging both our sourcing expertise and scale to secure equipment and realize favorable pricing on key items. our teams are highly focused on balancing long-term profitability for our franchisees and offering value for our customers. With the power of our well-capitalized and committed franchise system and the unique global scale we have at Young, we remain confident in our ability to grow in any economic environment. Next, I'll discuss our unmatched operating capabilities and the three pillars of our digital strategy. easy experiences, easy operations, and easy insights. I'll start with an update on our easy experiences pillar, which focuses on delivering exceptional customer experiences through technology and dedicated operational programs. QSR Magazine ranked Taco Bell and KFC in the top three for fastest drive-through times in the U.S. In fact, Taco Bell drive-thru times were nine seconds faster year over year. KFC division kiosk sales also stood out this quarter with a more than 40% increase in sales year over year and 6% system sales mix. An impressive result considering that only 15% of KFC restaurants currently have kiosks. We are also encouraged that the TikTok platform is expanding beyond chat ordering with its e-commerce engine, with a front and back-end website and mobile app that is serving some of our smaller international countries. We recently went live with TikTok's e-commerce engine in KFC Mexico and saw an increase in conversion rates post-launch. We expect TikTok's e-commerce engine will be live in 18 countries by year-end. Moving on to our easy operations pillar that centers on the team member and franchise partner experience. We completed the integration of our second delivery aggregator into the Pizza Hut US system this quarter, building on our initiative to partner with third party aggregators and provide our customers with more options to access our brands. Further adoption of third party aggregators for delivery as a service has also helped ensure that we can meet customer expectations during peak delivery hours and save valuable time for our team members, who can then spend more time elevating the customer experience. Additionally, the global rollout of Dragontail's smart kitchen management and driver tracking system continues to progress at an impressive rate. Lastly, I'll cover our easy insights pillars. which leverages the power of data and analytics to allow our teams to make smarter decisions. Quantum, the marketing analytics company we acquired last year, continues to roll out to markets around the world. We are now leveraging Quantum's media optimization platform across nearly 60 brand country combinations, covering more than 60% of our system sales. Notably, Pizza Hut Australia, has seen a double-digit increase in return on media spend after deploying Quantum's advanced media mix analytics platform. Our brand teams are also using Quantum's expanded suite of tools in areas such as customer analytics, pricing optimization, and market intelligence. Next, I'll provide an update on our balance sheet and liquidity position. Our net leverage ratio ended the quarter at five times despite the exclusion of our Russia business. Though capital markets continue to adjust to higher interest rates, we are proud of the work our treasury team has done to put us in the enviable position of having no significant maturities over the next three years and approximately 94% of our debt fixed. As we've said before, our capital priorities remain consistent, invest in the business, maintain a healthy balance sheet, pay a competitive dividend, and return the remaining excess cash to shareholders via share revurchases. Our capital expenditures for the quarter, net of re-franchising proceeds, were $51 million. Our full year expectation for net capital expenditures is now approximately $200 million, reflecting $50 million in re-franchising proceeds and roughly $250 million in gross capex. With regard to our share buyback program, we repurchased 1.4 million shares in the quarter at an average share price of $116 per share, totaling approximately $157 million. Additionally, during September, the Board of Directors approved a new share repurchase authorization of up to $2 billion through June 30, 2024, that will take effect upon exhaustion of the current authorization. To close, I'm excited about the continued growth we saw this quarter and the momentum in our diversified development across the portfolio. This once again shows that our iconic brands and world-class franchise partners are well positioned to navigate any economic environment. Before wrapping up, I'd like to remind everyone that our Investor Day is taking place in person at the New York Stock Exchange on December 13th. We look forward to seeing you then. With that, Operator, we are ready to take any questions.

Thank you. We will now start today's Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally, and please only ask one question during today's conference. Our first question today comes from Dennis Geiger from UPS. Your line is now open.

Great. Thanks for the question. I wanted to ask about the strength in the U.S. business, and maybe David or Chris, could you talk a little bit more about what you're seeing across the brands in the U.S., what you're seeing from a consumer behavior standpoint, and I guess really how that guides how you're thinking about the resiliency of the brands in the U.S. going forward. Thank you.

Yeah, from a consumer standpoint, obviously you saw the top line results we reported this quarter. We're very pleased with them. They're very strong. So generally around the world, we're not seeing any concerns from a consumer standpoint. Then if you dig deeper into what's going on in the U.S., it's been well documented that there's a little bit of a K-shaped recovery. And we're seeing a little bit of that. We're hiring consumers, having a little bit more demand. But the great thing about our business is our brands are so well positioned to succeed in any environment. And in particular, our business is 80% globally based on Taco Bell US and KFC International. Those two businesses make up 80% of our profit. They're incredibly well positioned to deliver value to consumers and with appealing brands. So in the U.S., this K-shaped recovery, there's a little bit of K-shaped demand for value on the high end. The demand is more for premium value. That's why you're seeing us do things like the double steak grilled cheese burrito at Taco Bell, which is at a higher price point than normal, but still a great value and a big part of our success at Taco Bell. And then on the low end, in Q3, you saw KFC go back to mac and cheese bowls with some success that moved the needle So that's a value offering, but at a price point that's appealing to a low-end consumer, but still not just discounting our core product, something interesting that consumers are talking to. And the cravings menu at Taco Bell, the same thing, where we're offering burritos for $2. So as far as the consumer environment, for us in our industry and for our brands, which are particularly well-suited to navigate it, It looks good. Now, I know in other industries, like, you know, in other parts of retail, if you bought some furniture a couple years ago, you probably pulled your demand forward, and, you know, they're not going to have the same demand today. We don't have that issue in our industry because if you bought lunch two years ago, that's not influencing your decision today, and your decision today is more determined by how we stack up versus your options. We know that we're a really attractive option versus grocery, which is experiencing a lot of inflation. So this is a good environment for us.

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

Good morning. Chris and David, is 6% unit growth the new 5? I guess I'm thinking about durability of that growth rate as you think out. And just remind us, One, when you think about sort of targets for growth rate, what's the time horizon? You know, ultimately the base effect of large numbers catches up with such a large system. So is it a three-year target, five-year? How do you sort of frame that internally? And Chris, can you also just talk about cost of capital, cost of debts gone up? You know, is that a worrisome impediment to growth over the intermediate term as to show the rate environment changes?

I'll take the first part of that and let Chris talk about some of the capital issues out there. I don't think the low and large numbers were anything close to catching up on that in our census. We continue to put up impressive development numbers. You saw the numbers this quarter and our year-to-date numbers today are roughly in line with what we had last year at this time, which was a record for us and for the industry, we believe. showing the strength of our development, and it is broad-based. The amount of development that's occurring outside of China continues to climb nearly 60% now, and that's in 74 countries last quarter. So this is broad-based. We think we have tons of opportunities around the world for all the foundational reasons you would want. The returns that our franchisees are getting are strong. Taco Bell being voted the best franchise opportunity out of the 500 that are ranked. in the U.S. And then, you know, Yum China, I think last night on their earnings call talked about the great two-year KFC paybacks and three-year Pizza Hut paybacks. So, with those kinds of returns, we know we're going to continue development. We have visibility into the pipeline and we feel good about it, despite all the challenges in the environment. As far as, you know, the pace of development, you know, we're pleased with the strength that we have and even in the face of losing this development that we had in Russia. The development story is good. And we know it's a big part of young's growth equation going forward. I'll turn it over to Chris, just for a few comments on the capital challenges.

And so, John, on the capital side, I'll take it in two buckets. One, just following up on David's comments around franchisees and unit development. Just a couple of additional thoughts there as it relates to capital. David mentioned in many of our markets around the globe, we have very strong returns that are significantly higher than interest rates. So even with small moves in interest rates, these are still highly attractive investments for our franchisees to make. And keep in mind that our franchisees, on average, compared to many other systems, are larger, more sophisticated, more well-capitalized, and more growth-minded. they're able to look through near-term noise in the market and actually take advantage of these types of disruptions in the marketplace to accelerate their growth. And so we're very pleased with the state of our franchisee base and our partnership with our franchisees. Plus, we have the strongest development team in the business. So we're working with them to navigate through that, but we feel good. In terms of cost of capital for our balance sheet, Our balance sheets at Young remain strong and very resilient. We've proved that as we've navigated the last few years. We're proud of the cash that we return to our shareholders. And we're set up well right now in this higher interest rate environment. We have no maturities, as we mentioned earlier, through 2026. Ninety-four percent of our debt is fixed. We've also, over the last few years, created more capacity in some of the lower-cost areas of our capital structure that we could access if needed. Right now, we're at five times leverage. But to be clear going forward, we're not wedded to five times leverage. We're going to do what optimizes returns for our shareholders. We review our strategy regularly with the board. So when it comes time, the next time that we would consider issuing debt, we'll look at where rates are at that time, we'll look at a set of other factors, and we'll make a decision on whether to issue or whether to grow into a slightly lower leverage ratio. But just know we're gonna do what optimizes returns for our shareholders.

Our next question is from John Ivanko from JP Morgan. Please go ahead.

Hi, thank you. Also a capital question, if I may. Obviously, there's a lot of focus on new unit development, as there should be. Clearly, the same store sales around the world, particularly KSE International, really does support an underlying franchise system that should, and I'm sure is, doing very well. But the question is on the existing base of assets, especially the existing base of assets that might be 10 plus years old. I mean, just how, you know, the overall system is from a capital perspective, are there any major projects, you know, that are happening in, you know, some major countries that around the world that maybe we just haven't heard about and does it make sense? Would it make sense, you know, for young to co-invest with its franchise system around the world? Obviously we all see the U S but you know, you have a lot of big countries around the world. where maybe putting some capital in the existing base of assets could be something that could drive longer-term brand value and shareholder value as well. Thanks. Yeah, thanks.

Good question on the existing asset base. We're, as we just discussed, a tremendous unit grower, but we also want to make sure that our current asset base remains fresh and relevant, provides a great experience for our customers, Of course, whenever you're growing at 6% units, every year that's a new chunk of new stores that are being added to the system. Plus, we have programs with our franchisees where they've got requirements around remodeling and keeping the assets base fresh. In terms of the responsibility for that, that lies with our franchisees. and it's part of their approach to being in our business, investing in stores. They know they've got to make investments over time to continue to keep the asset base refreshed, and our brands are working hard with the franchisees to do that.

Our next question comes from John Tower from Yum. Your line is now open.

Hey, this is John. How's it going? Just a quick question. We heard from one of your larger global competitors about the need to potentially offer franchisee relief to some of their partners in Europe over the next, say, 12 months or so. And the picture's kind of reminiscent of what we heard during COVID times due to these inflationary pressures in that market. So I'm curious to learn what you're hearing from your operators in that market and what they're doing to brace for the potential volatility ahead and, frankly, Maybe if you could even frame your own operating profit exposure to that region, that would be helpful as well.

Yeah, so obviously in Europe right now there are some challenges, particularly on energy inflation, that are facing our franchisees. Europe is an important growth market for us in the long run. We have meaningful but moderate exposure in the context of our global portfolio. Europe as a geography is about mid-teens percentage of our sales and our operating profit. The business continues to be strong from a top-line perspective there. If you look at KFC Europe, we had 25% system sales growth in Q3. Now, the U.K. was a little bit of a different story where those energy inflation is a bit more pronounced, and you've got the VAT holiday overlaps. continuing throughout the year. So we had, you know, slight negative sales there. Same thing in the pizza business, you know, strong in other parts, UK a bit more impacted. But we are working closely with our franchisees. We know this is going to be, you know, a challenge for them to navigate. And, you know, we manage the business on a franchisee by franchisee basis. So our teams in Europe are partnering with them, you know, setting the commercial plans for the business to help navigate those inflationary challenges.

Our next question is from David Tarangino from Bard. Please go ahead.

Hi. Good morning. My question really is about the sales strength you saw for both KFC and Pizza Hut, especially when you factor out China. You saw a pretty material acceleration in the comps relative to pre-COVID levels. So I guess on a three-year comp basis, a pretty big step up. If you could just talk about what you think drove that step up from the second quarter and how sustainable that trend might be. Thanks.

Yeah, thanks, David. I'll just comment on a couple of things. And, of course, in the speech I already mentioned, you know, the foundational things that are driving our business that will continue to drive it this quarter and in future quarters, like the progress that we're making on technology and digital. But beyond that, I guess what I would highlight is outside the U.S., while we had good growth in both developed and emerging markets, our emerging markets are really starting to perform strongly. We were plus 20 in emerging markets outside the U.S. ex-China. So that was a big driver, and that was expected. We talked about this on previous calls, that as these markets recover from COVID, we expected outside growth. The really encouraging thing about that is that's actually – plus 16 versus 2019. So not just the recovery, but real growth versus that 2019 baseline. And then, you know, in the U.S., obviously Taco Bell has been a steady high performer. But KFC, I think, did a better job on value with the mac and cheese bowls this quarter. Pizza Hut, as we talked about in previous quarters. has made progress on embracing third-party aggregators to solve some of that delivery challenge. So we saw a meaningful improvement in their trends on delivery sales. So that all added up to, as you mentioned, good, strong growth around the world.

Our next question is from Andrew Charles from Cohen. Please go ahead.

Great, thanks. Gabe, across the U.S. portfolio, you guys are obviously leading the value across all three brands, and I'm curious how you see the industry evolving as we look at the end of 2022 and into early 2023. Do you expect the domestic quick service industries to focus on value to further intensify in a difficult traffic backdrop, or do you think value activity is going to be challenged by just the high COGS and robust labor backdrops?

Yeah, look, it's hard to predict anything over the last few years in this environment. The one thing that I can predict, though, is our brands are incredibly well positioned to navigate any environment. We've demonstrated that over the last few years. I feel confident as we move forward. Value does seem to be more of a factor today than it might have been six or nine months ago. And that's just more of a return to normal for the industry rather than it is an exaggerated emphasis on value. But as I mentioned in my earlier comments, the scale that we have, our purchasing ability, the appeal of our brands, the fact that the vast majority of our businesses that talk about U.S. and KFC international peace, that are so strong and so successful at navigating value and give us great confidence that we will be able to continue to thrive in any environment. And there is a little bit more of an emphasis on this premium value, which is good for the industry, where we'll have products that aren't at the absolute lowest price can still be very appealing to consumers, as long as the overall equation, the experience, the convenience, the credibility of the food is all there.

Operator, we have time for one more question.

Our last question today will be from David Palmer from Evercore. Please go ahead.

Thanks. Question on Pizza Hut US. What have been the learnings with regard to third-party delivery marketplaces and drivers as a service, the contribution of growth from that, but also what concerns did you have going into it with your franchisees and How has it played out versus your plan? And then related to the unit growth thing, I'm wondering, you highlighted Pizza Hut International having a strong unit opening quarter, but I'm wondering about the U.S. stabilizing and how you're feeling about that being a driver to your net opens as we go into 23. Thank you. Thanks, David.

I'll take on Pizza Hut U.S. first. As David mentioned, the addition of aggregators has been one part of solving the delivery capacity challenge that we mentioned earlier in the year. You know, we talked about how at the beginning of the year we viewed this, you know, more as a capacity challenge than a demand challenge. And we've used our relationships with the aggregators, both being on their platforms and working with them on delivery as a service as one mode to solve that Plus, I think we've mentioned that we have also adjusted some of our hiring practices and our HR practices or our franchisees have to attract more drivers into their jobs. Things like reducing the time it takes to apply for a job at Pizza Hut. Both of those have contributed to us having significantly more delivery capacity in the market. If you look at Q2, we had a 23-point gap between our carryout growth and our delivery growth. In Q3, we actually extended our carryout growth, but the gap narrowed to 17 points. So that means delivery was significantly higher. And I think that's just attributable to both of those levers giving us more delivery capacity into the system. There's one other benefit from the aggregator platforms, which is we get an incremental customer who sees us on those marketplaces. And so that's probably been a bit of an impact there as well. And we've mentioned earlier that we've seen franchisees who adopted these faster run a little bit ahead of the system. So I think that is part of what's driving growth in the Pizza Hut U.S. system. On the unit growth question, obviously we had strong unit growth in Taco Bell U.S. Pizza Hut U.S. and KFC U.S. have stabilized. And in the long run, we expect all of our markets around the globe to be focused on driving units. And so the teams are working on strategies to do that. But right now those businesses are in a stable place from a unit standpoint, as you see in the results this year.

To wrap up, obviously a very strong quarter for YUM. We're pleased with the results. led by our great teams in the field. You know, we've got an investor conference coming up, and it's actually the first investor conference that we've had in four years, given the delays from COVID, so we're really eager to get to spend some time with all of you in New York on December 13th. In particular, we've got some new leaders in the business that you'll get to hear from live in person for the first time. Very excited about letting them tell the great growth stories that we have going on all around the world. A great quarter, and thanks for your time today.

That concludes today's conference call. You may now disconnect.