Yum! Brands, Inc.

Hello, everyone, and welcome to the first quarter 2023 Young Brands Earnings Conference Call. My name is Bruno, and I'll be the operator of today. During this presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. Please limit to one question, and remember to unmute your microphone when it's your turn to speak. I would now like to hand over to your host, Jody Dyer, Vice President 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 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 of 2022, we elected to remove the Russia business from key performance metrics. For the purpose 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 both our worldwide unit growth and worldwide system sales growth 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 first quarter. All GAAP figures reported continue to include the impacts of Russia operations for KFC for the full 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 a 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. As a reminder, in April, we completed the exit of the Russia market by selling the KFC business in Russia to Smart Service Limited, including all Russian KFC restaurants, operating system, master franchise rights, and the trademark for the Rostics brand. Beginning in the second quarter, the Russia business will no longer be reported in our GAAP results, including franchise revenue and G&A. 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. Looking ahead, our second quarter earnings will be released on August 2nd, 2023 with a conference call on the same day. Now I'd like to turn the call over to David Gibbs.

Thank you, Jody, and good morning, everyone. Our first quarter results provide further proof of the power of our portfolio of iconic brands. Both the diverse nature of our global footprint and the advantages of our business model enable us to thrive in any environment. Our incredible teams and franchise partners delivered another strong quarter with 13% system sales growth driven by 8% same-store sales growth and 5% unit growth. A strong set of commercial strategies that balance compelling value and craveable distinctive products fueled our first quarter sales momentum. We continue to execute on our digital strategy to create more seamless, personalized experiences to drive greater customer engagement and easier access to our brands. These efforts resulted in broad-based acceleration in digital sales growth, leading to a record quarter for both digital system sales of nearly $7 million and a digital sales mix that exceeded 45%. Importantly, our core operating profit grew 11% in the first quarter, including a one-point headwind from the removal of Russia profits, giving us great confidence in delivering on our long-term growth algorithm this year. Before I discuss our first quarter results, I wanted to provide an update on Russia. In April, we announced the completion of our sale of the KFC Russia business to Smart Service Limited, a local operator, including all Russian KFC restaurants, operating systems, master franchise rights, and the trademark for the Rostics brand. As part of the sale and purchase agreement, Smart Service has agreed to retain our company employees in Russia. With the completion of this transaction, we have ceased our corporate presence in Russia. Now I'll discuss our first quarter results through the lens of our recipe for good growth framework. I'll begin by talking about our relevant, easy, and distinctive brands, or RED for short, and our unrivaled culture and talent. Chris will then share the details of our first quarter financial results before discussing our bold restaurant development and unmatched operating capabilities. First, Let's discuss our iconic red brands, beginning with the KFC division, which represents 50% of our divisional operating profit. First quarter system sales grew 15%, driven by 9% same-store sales growth and 7% unit growth, reflecting broad-based strength. Globally, KFC is consistently executing its winning recipe of core menu innovation, disruptive value, expanding category use occasions, and doubling down on digital initiatives. We were pleased to see strong year-over-year growth in our KFC China business. As usual, Joey Watt and her team did a great job navigating the complex operating environment as consumers became more mobile in the quarter and KFC was there to meet their needs. Additionally, our international ex-China same-store sales grew 11%, fueled by strong transaction and check growth. We attribute this exceptional performance to strong value offerings, the continued return of dine-in traffic, digital initiatives, and strategic third-party partnerships. We've seen sustained momentum across many of our emerging markets, including Latin America and the Middle East. Additionally, we've seen renewed strength in many European markets, where the team is promoting value at several price points to appeal to a broader customer base while innovating around our core menu offerings. The focus at KFC U.S. is targeting new audiences and category use occasions by using relevant value and product innovation as demonstrated with the introduction of boneless offerings, including the return of the Double Down Sandwich and launch of two-for-five-dollar wraps in the first quarter and the national launch of the much-anticipated Chicken Nuggets early in the second quarter. Moving on to the Taco Bell division, which represents 34% of our divisional operating profits. Before I get to results for the quarter, I want to highlight that Mark King was recently named the 2023 Restaurant Business Leader of the Year for the incredible progress Taco Bell has made growing the brand while expanding unit economics and strengthening relationships with franchisees under his leadership. Seeing our world-class talent recognized more broadly across our industry gives all of us at Yum great pride. Taco Bell first quarter system sales grew 12%, led by 8% same store sales growth and 6% unit growth. These incredible results build on years of sustained top line strength as the team executes on its consistent growth formula, which leverages the combination of brand buzz with unparalleled value offerings, mass occasions, and digital initiatives. This quarter, Taco Bell created customer buzz around craveable product offerings that included the Crispy Melt Taco and the Grilled Cheese Burrito, while still providing everyday value through $2 burritos on the Cravings Value menu. Strong demand for the Grilled Cheese Burrito is a fantastic example that proves Taco Bell can win in the Big Burrito category and participate in higher price points while maintaining value leadership. Taco Bell U.S. is leaning into its digital initiatives to drive customer engagement, with year-over-year digital sales up approximately 60%, leading to an eight-point improvement in its digital mix. Taco Bell recently launched Delivery as a Service through its mobile app to create easier access for our customers to get our craveable products. Additionally, the team also continues to make progress against our recipe for good growth strategy with the ongoing transition of their packaging suite to more recycle-ready options. Taco Bell International grew system sales 25% in the quarter, driven by continued development momentum and strong value propositions through core menu innovation offerings. Next, I'll discuss the Pizza Hut division, which accounts for 17% of our divisional operating profits. System sales grew 10% for the quarter, driven by 7% same-store sales growth and 3% unit growth. Same-store sales growth accelerated sequentially from the fourth quarter, driven by China and continued strength in the U.S. Peatside International, which accounts for 9% of our divisional operating profit, grew system sales 10%, led by 5% same-store sales growth and 5% unit growth. Following the successful launch of Meltz in the US, the team launched this breakthrough product in 10 additional markets, including the UK, Canada, and several markets in Latin America. I'd like to recognize our global pizza team for their collaborative efforts to scale this winning innovation quickly. Our markets not only shared consumer insights and product innovation at unprecedented speed, but the operations team also used augmented reality to expedite training of our international team members through our intelligent coaching app. Pizza at U.S., which represents 8% of our divisional operating profit, achieved 10% system sales growth with 8% same-store sales growth and flat unit growth. Melts in combination with the big New Yorker in the quarter helped to drive positive transaction growth by attracting new and repeat customers. The team continues to expand strategic partnerships and is now integrated with the three major food aggregators in the U.S. We view aggregator marketplaces as an additional channel to provide customers greater access to our brand while also attracting an incremental customer. The Habit Burger Grill division grew system sales 8% with 8% unit growth and flat same-store sales growth. The Habit team continues to focus on expanding its digital capabilities through growing its mobile app user base and partnering with third-party aggregators. Before moving on to our unrivaled culture and talent, I want to take a moment to thank Russ Bendel and celebrate his accomplished career in the restaurant industry as he plans to retire next month. Russ's passion for restaurants has always shined through, and anyone who knows Russ knows that what he really values above all else is people. Everyone is a friend to Russ, and he is beloved by all who have had the privilege to work beside him, whether in a kitchen or an office. We recently announced that Russ's successor is former KFC Global Division CFO, Shannon Hennessy. Shannon is an exceptional leader, and we're excited to have her drive the next chapter of Growth for Habit and continue Russ's focus on people. More broadly, on our unrivaled culture and talent growth driver, we've held powerful forums this year that galvanized our franchisees and top talent around our recipe for good growth. In February, we hosted our 11th international franchise convention in Singapore, bringing together our global brand leadership teams and many of our 1,500 franchisees from around the world. Having attended this convention for many years, I've never seen this level of unity and enthusiasm for growth, particularly as it relates to development, and broad strategic alignment with our franchise community. Our franchisees are some of the most growth-minded entrepreneurs in the world, and the International Franchise Convention was an opportunity to learn from, recognize, and celebrate each other's achievements. Our partnership with our franchisees is as strong as it's ever been. We are strategically aligned to keep our iconic brands red and our global growth momentum strong by leveraging the investments we've made in consumer insights, our digital ecosystem, innovative technologies, and data analytics. Additionally, we are focused on unlocking opportunities for our people and communities while promoting equity, inclusion, and belonging across all aspects of our business. We were proud that many of our leaders, including myself, participated in the Women's Food Service Forum as we focus on elevating all voices and achieving gender parity globally by 2030. We also announced the launch of Franchise Fast Start, a program funded by Lafayette Square to provide lending support to expand Yum! franchise ownership in underserved communities in the U.S. As a result of our efforts, we've recently been named to Newsweek's America's Greatest Workplaces for Women and Forbes' America's Best Employers for Diversity list. To wrap up, I'm always thrilled to start the year with fantastic momentum, especially when the strength is broad-based across our global portfolio. I remain confident in our ability to navigate any economic environment as our brands stand for unmatched value and convenience, providing a range of products and price points to meet all customers' needs. We are poised to maintain our robust sales momentum given our pipeline of red product innovation, accelerating digital sales, strengthening operational execution, and compelling value across our global portfolio of iconic brands. With that, Chris, over to you.