Yum! Brands, Inc.

Hello everyone and welcome to the Young Brands Inc 2022 fourth quarter earnings conference call. My name is Charlie and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypad. Please note we will only be taking one question from each person to ensure we get around to everybody in the queue. I will now hand over to your host Gavin Felder, Chief Strategy Officer and Interim Head of Investor Relations to begin. Gavin. Please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us. As a reminder, I will be covering for Jody Dyer while she is 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, Please note that this 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 call 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 release and relevant sections of our filings with the SEC to find disclosures, definitions, and reconciliations of non-GAAP financial measures and other metrics used on today's call. Please note that during today's call, all system sales growth and operating profit growth results exclude the impact of foreign currency. Please also note the following financial reporting treatment related to 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. For the purposes of this call, all references to system sales growth and unit growth results for the quarter are adjusted to remove our Russia business from the prior year base. This negatively impacted our worldwide unit growth by two percentage points and our worldwide system sales growth for both the fourth quarter and the full year by two percentage points. These units were removed from our same-store sales calculations and thus do not impact same-store sales results for the fourth quarter or full year. All GAAP figures reported continue to include the impacts of Russia operations for KFC for the full quarter and year and for Pizza Hut prior to our transfer of that business to a local operator in the second quarter. These GAAP figures primarily include royalty revenues from continued franchise operations and G&A to support our Russia business. Additionally, our GAAP G&A includes 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 in which they are earned, subsequent to the start of the conflict, to corporate and unallocated, and reflected those net operating profits 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 reports section of our website. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. Looking ahead, our first quarter earnings will be released on May 3rd, 2023 with the 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. 2022 truly was a landmark year for YUM. In spite of the challenges from significant spikes in commodity inflation and pockets of labor shortages, Our world-class teams and franchisees partnered together to deliver another year of amazing growth. We achieved record-breaking industry development, opening 4,560 gross units that translated to nearly 3,100 net new units, beating our prior record set just last year and ending the year with over 55,000 restaurants globally. For the full year, System sales were up 8%, and core operating profit was up 6%, which includes a two-point headwind from the removal of Russia profits this year. Perhaps the most impressive performance came from Taco Bell, finishing 2022 with same-store sales growth of 8%. Taco Bell also bucked the industry trend on margins, holding company-operated margins flat from last year despite elevated industry-wide cost pressures. KFC International delivered a record year, opening approximately 2,400 gross units and nearly 2,000 net new units, translating to 9% unit growth. Combined, these two parts of the business account for approximately 80% of our divisional operating profit. We finished the year on a high note with system sales growth of 10% in Q4, driven by 6% same-store sales growth and 6% unit growth. contributing to 22 percent core operating profit growth, which includes a two-point headwind from the removal of Russia profits this year. Such incredible performance under highly challenging conditions underscores the tremendous confidence I have that even after a remarkable 25 years of growth as a public company, our best days are clearly ahead of us. Before I discuss our 2022 results in detail, I wanted to give a brief update on our planned exit from Russia. As mentioned during our Q3 call, 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. We expect the transaction to close following satisfaction of all closing conditions. Following the closing, we will have ceased our corporate presence in Russia. I also want to acknowledge the devastating impact of the earthquakes that happened earlier this week. affecting our teams in Turkey. Our people remain our number one priority, and I want to recognize the efforts from our franchisee, Ilkun Sahin, as he and his team work to prioritize people's safety as they navigate through this tragedy. As we shared at our recent Investor Day, our strategy is guided by our recipe for good growth, and today we will discuss our 2022 results through the lens of that framework. I will talk about two of our growth drivers, namely our relevant, easy, and distinctive brands, or RED for short, and our unrivaled culture and talent. Then I'll provide an update on our efforts to drive the good agenda across our brands and our business. Chris will then share the details of our fourth quarter financial results before discussing our bold restaurant development and unmatched operating capabilities growth drivers. I'll start by discussing our iconic RED brand. Beginning with the KFC division, which accounts for 49% of our divisional operating profits, KFC full-year 2022 system sales grew 9%, driven by 7% unit growth and 4% same-store sales growth. Q4 system sales for KFC increased 10%, thanks to 7% unit growth and 5% same-store sales growth. Results were unfavorably impacted by COVID-related challenges in China. Excluding China, our KFC business continues to grow at an unbelievable pace with same-store sales growing 9% in the quarter, driven in part by our world-class franchisees and continued impressive momentum in our emerging markets. At KFC's international business, which represents 44% of our divisional operating profit, Q4 system sales grew 11%. Several markets showed stellar results. In Japan, for example, KFC is synonymous with the Christmas holiday family meal. In this year, Japan's system sales over the Christmas period grew 16% year over year. Africa drove double-digit same-store sales growth in the quarter and continues to benefit from several customer-facing digital initiatives. To build on that success, our South Africa team will continue to roll out kiosks with a goal of installing them in 95% of our stores by 2023. Moving on to our Taco Bell division, which represents 35% of our divisional operating costs. On a global basis, full year system sales grew 11% driven by 8% same store sales growth and 5% unit growth. This team continues to deliver industry leading results and coupled with the incredible array of talent in place and our strong franchisee partnerships, it should be no surprise that Taco Bell earned the top spot on Entrepreneur Magazine's Franchise 500 ranking for the third year running. Moving on to our fourth quarter results, Taco Bell U S grew system sales, 14% underpinned by an exceptional 11% same store sales growth. The powerful momentum from previous quarters continued with the relaunch of the cult classic Mexican pizza for which we provided early access to our loyalty members. We ended the year with around 45 million Mexican pizzas sold an impressive number considering they were only available for four months of the year. We also made encouraging progress in our breakfast layer, building on high-profile branding partnerships such as Doja Cat in Q1 and Devante Adams in Q3. Taco Bell brought in Pete Davidson to help drive consumer buzz for breakfast. This led to 9% transaction growth for the day part. Overall, Taco Bell did a terrific job this quarter at balancing both ends of the consumer spectrum by featuring premium products that are consumers' craves, such as the grilled cheese burrito, with sharply priced items like nacho fries. At Taco Bell International, Q4 system sales grew 23%, driven by 29% unit growth and 4% same store sales growth. Q4 closed a truly breakthrough year for our international business, which has now crossed the 1,000 unit mark. To put this feed into some historical context, Taco Bell International has built 40% of its current estate within the last two years. It wasn't just our development engine on fire this year. Many of our markets reached double-digit same-store sales growth in 2022, including some of our largest markets with India up 33%, Thailand up 36%, and Spain up 20%. Next, at the Pizza Hut division, which accounts for 16% of our divisional operating profit, our full-year system sales grew 3%, led by 4% unit growth and flat same-store sales growth. Pizza International, which accounts for 9% of our divisional operating profit, achieved system sales growth of 4%, driven by 6% unit growth and a 1% decline in same-store sales in the fourth quarter. Results were heavily impacted by the ongoing COVID-related challenges in China. Ex-China, our same-store sales remained healthy, growing 4%. Several markets showed noticeable strength, including Japan, where same-store sales grew 10%, owing to a strong holiday performance and recent product launch of Tuscany pasta bowls that featured a local flavored twist. At Pizza at US, which accounts for 7 percent of our divisional operating profit, Q4 system sales grew 5 percent, driven by 4 percent same-store sales growth and flat unit growth. The strength in the quarter was driven by a combination of factors that included new advertising to highlight both premium and value offerings, growth partnerships with aggregators, and the success of the new MELTS product. MELTS over-indexed the pre-dinner timeframes and individual occasion tickets and helped to recover the lower household income base due to its strong value proposition. Lastly, five distinct national marketing campaigns on Uber Eats and DoorDash helped aggregator transactions grow 30 percent in the quarter. Lastly, at the Habit Burger Grill, The team continues to make progress on setting up the business for long-term growth. Habit's burgeoning digital channel finished the year strong with digital mix ending at 35%, a truly impressive level after only launching in 2020. I'm pleased to share that Habit is now 18% franchise, which is up five points from last year. With $2 million average unit volumes and a compelling growth strategy, I'm confident in the long-term growth of our newest brand. And now onto our unrivaled culture and talent growth drivers. Our whole market YUM continues to be our people first culture, which drives retention and recruitment of amazing talent. Highlights in 2022 included bringing our top 250 leaders from around the world together for a global leadership summit and celebrating the important role our world-class talent has played as we marked our 25th anniversary as a publicly traded company. Internally, we continued to promote talent, naming a president of the Habit Burger Grill and a new president of KFC US. Externally, we attracted top talent, welcoming a new global chief brand officer for Taco Bell, a new global chief operating and transformation officer for Pizza Hut, and a new chief corporate affairs officer for Yum. When it comes to all the good we do, we released our 2021 Recipe for Good report during the year, detailing our strong progress around our three priority areas. With our science-based targets to decrease greenhouse gas emissions by 46 percent by 2030, we decreased emissions against our 2019 baseline by approximately 24 percent for company-owned buildings and our corporate restaurants, while our franchisees decreased emissions by 20 percent. Regarding better packaging, we published a new global harmonized packaging policy with a focus on eliminating unnecessary packaging, shifting to more sustainable materials, and supporting better recovery and recycling systems. We increased the number of women in senior leadership globally to 42 percent, which keeps us on track to achieve gender parity in leadership globally by 2030 in alignment with Paradigm for Parity. We were pleased YUM received industry-leading rankings on the Carbon Disclosure Project and inclusion on the 2022 Dow Jones Sustainability Index North America, the 2023 Bloomberg Gender Equality Index, and Newsweek's list for America's most responsible companies and America's greatest workplaces for diversity. To wrap up, I'm thrilled with our 2022 performance, particularly given many of the unpredictable obstacles our team had to navigate. Our results continue to reflect our resilient, diversified business and the strength of our portfolio, led by our iconic brands. I'm confident we will continue to execute with superior performance and deliver industry-leading growth, all of which will help to maximize value to our shareholders.