Yum! Brands, Inc.

Hello everyone and welcome to the Yum! Brands Inc 2023 fourth quarter earnings call. My name is Charlie and we'll be coordinating the call today. You'll 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 keypads. Please note that we will only be taking one question from each analyst before moving on to the next questioner. I'll now hand it over to our host, Matt Morris, Head of Investor Relations to begin. Matt, 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 on earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings release and the 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. As a reminder, Several of Yum! Brand's business units report on a period calendar basis, including all U.S. and Canada brands, KFC UK, and KFC Australia. When forecasting 2024, please keep in mind that this year will include an extra week in the fourth quarter for those entities. 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. We would like to make you aware of upcoming Yum! Investor events in the following. Our first quarter of earnings will be released on May 1st with a conference call on the same day. Finally, please mark your calendars for an in-person Taco Bell Consumer Day in December at the Taco Bell headquarters in Irvine, California. Stay tuned for more details and invitations to follow. Now, I'd like to turn the call over to David Gibbs.

Thank you, Matt, and good morning, everyone. Before I discuss our results, I want to express our continued concern for those impacted by the ongoing conflict in the Middle East. We continue to prioritize the safety and well-being of our franchisees and employees in the region. Turning to 2023, it was a remarkable year for Yum! Brands as we crossed the $60 billion system sales threshold and exceeded all aspects of our long-term growth algorithm. Despite facing numerous challenges around the world, our incredible teams delivered another exceptional year of growth across our business. We set an industry development record for the third straight year. We made massive strides in scaling our proprietary digital and AI-driven ecosystem, and we continued to build a talent base that I believe is the best in the industry. We delivered 6% unit growth, 10% system sales growth, and 12% core operating profit growth. We entered 2024 having opened just shy of 10,000 net new restaurants over the past three years and are well on our way to reaching 60,000 restaurants this year. This growth would not be possible were it not for our world-class franchise partners who continue to deploy their own capital based on their confidence to invest behind the long-term potential of our brands. Along with the record-breaking success we've had on development, our digital strategy has helped propel top-line results and improve bottom-line profits. Digital sales approached $30 billion in 2023, up 22% year-over-year, with Mix now exceeding 45%. At the same time, we have accelerated the deployment of our proprietary technologies to optimize back-of-house operations and make it easier to run our restaurants. In doing so, we are equipping our franchise partners with distinctive capabilities that differentiate them from the competition, especially in emerging markets. I'll now share some more details on the fourth quarter specifically. During the quarter, top-line sales were impacted by the conflict in the Middle East region, with varying degrees of impact across markets in the Middle East, Malaysia, and Indonesia. This represented a low single-digit headwind to Yum's overall fourth quarter same-store sales growth. This trend has continued into the first quarter, and we expect the sales impact to decrease over the course of 2024. Key to our growth is the performance of our twin growth engines, KFC International and Taco Bell US, which account for approximately 70% of Yum's system sales and roughly 80% of Yum's division operating profit. In 2023, KFC International opened nearly 2,700 new restaurants, reaching 10% growth With restaurants opened across 96 countries, more than 80% of unit growth came from our 15 publicly traded franchisees. Entering 2024, I have strong confidence in the durability of KFC's global expansion, for which we continue to see an incremental 50,000 restaurant opportunity over the long term. On a global basis, Taco Bell crossed the $15 billion system sales milestone this year, reflecting the growing scale of this powerhouse brand. Turning to Taco Bell US, which contributes more than 75% of our US divisional operating profit, the brand maintained its two-year same-store sales trend in the fourth quarter, outperforming the QSR industry. Taco Bell continued to deliver industry-leading margins at 24% this year, while at the same time leading the QSR industry in several key value perception indicators. Now, I'll discuss our relevant, easy, and distinctive brands, or RED for short, followed by our unrivaled culture and talent and good growth strategy. Chris will then provide an update on our fourth quarter results and balance sheet position, followed by our bold restaurant development and unmatched operating capabilities. starting with the KFC division, which accounts for 50% of our divisional operating profit and will soon cross the incredible milestone of 30,000 units. For the year, system sales grew 12%, with 8% unit growth and 7% same-store sales growth. For the quarter, KFC achieved 7% system sales growth, owing to 8% unit growth and 2% same-store sales growth. Sales trends decelerated during the quarter in several markets as a result of the conflict in the Middle East. KFC China grew system sales by an impressive 20% during the quarter. We had several other standout markets this quarter, including 16% system sales growth in Latin America and 13% system sales growth in both Africa and Thailand. In Latin America, we targeted new consumers and day parts using compelling value offers, and we expanded our KFC original nuggets. In Africa, the team boosted its breakfast day part with new beverages including signature coffees at a great price. The Thailand market saw strong transaction growth driven by smart value offerings across all day parts. At KFC US, same-store sales were flat this quarter with trends on a two-year basis remaining consistent from the prior quarter. In Q1, the team has planned a range of exciting initiatives including the Smash Potato Bowl, the first bowl innovation since 2019, and the rollout of KFC's first loyalty rewards program. Moving on to the Taco Bell division, which represents 36% of our divisional operating profit. At Taco Bell U.S., fourth quarter same-store sales grew 3% and 15% on a two-year basis, outperforming the QSR industry by three points. Taco Bell U.S. faced tough laps early in the quarter, but finished the year strong with comps up over 5% in the final period. The quarter included a record digital sales mix, which reached 31%, up 7 points year over year. Growth in kiosk sales was a large driver, with in-store kiosk sales mix increasing 15 points from Q4 last year. Optimizing our digital channels is also contributing to growth in Taco Bell's loyalty program, with active loyalty users growing 17% in 2023. The team plans to bring exciting enhancements to the loyalty program in the second half of 2024 to capitalize on digital engagement and provide an easier experience for customers to earn and redeem points. While not surprising, I'm always proud to see our incredible Taco Bell team's efforts being recognized. with Entrepreneur Magazine naming the brand the number one franchisor for the fourth year running, and with Nation's Restaurant News crowning Taco Bell the 2023 brand icon. With an unprecedented range of exciting innovations launching this year, including at least one new product every five weeks, twice the rate of 2023, I'm confident Taco Bell will remain a brand icon for years to come. At Taco Bell International, we delivered 14% unit growth this year. The majority of this growth was contributed by our big four scaled markets, including Spain, which opened 19 new units this year and is on track to reach 150 units in Q1. As we enter 2024, we will work with our franchise partners in these markets to build brand and category awareness with Mexican food, particularly in Europe and Asia, leaning into fan favorites and expanding protein offerings. Additionally, we are working on scaling and entering new markets that will enable a broader base from which to grow. Next is the Pizza Hut division, which comprises 15% of our divisional operating profit and will soon eclipse 20,000 units. In Q4, system sales grew 1%, with 4% unit growth and a 2% decline in same-store sales. Sales trends decelerated during the quarter in several markets as a result of the conflict in the Middle East. For the full year, system sales grew 5%, including 4% unit growth and 2% same-store sales growth. At Pizza Hut International, same-store sales were flat for the quarter. The team continues to roll out melts across the globe to build the individual eater occasion. Strength in the aggregator channel continues to be a bright spot across several markets, including Canada and Latin America. Buy-one-get-one deals coupled with aggregator promotions drove transaction growth in Canada during the quarter. In Latin America, the promotion of our own digital channels in Brazil combined with the New York-style pizza helped boost sales for that market. At Pizza at US, same-store sales declined 4% for the quarter while growing 1% for the full year. The Meltz launch and the promotion of the Detroit-style pizza in the prior year contributed to a difficult lap this quarter. Pizza at U.S. will face another challenging lap in Q1 as same-store sales increased 8% last year, reflecting a full quarter of sales from the Meltz platform and the Big New Yorker. However, we expect performance trends on a two-year basis to improve in the first quarter. In Q1, the team will launch two limited-time offers, including hot honey pizza and wings, a perfect pairing for fans to enjoy in the run-up to the Super Bowl. In the months ahead, the team will be announcing some exciting innovations to the MELTS platform. Lastly, at the Habit Burger Grill, for the full year, system sales grew 6% led by 8% unit growth. Reflecting on 2023, Habit's new leadership team focused on improving all elements of Habit's operations, including expediting a robust kiosk rollout, implementing a sales-driven labor optimization model, and harnessing Yum's co-op purchasing group to lower procurement costs and rationalize SKUs. As a result of these efforts, the team achieved a 380 basis point increase in full year store level margins despite softness in sales. Now I'll turn to our good growth strategy, starting with our people pillar. We take great pride in developing our talent and ensuring we have a strong bench to drive performance, and we were thrilled to be recognized in Time Magazine's inaugural list of the best companies for future leaders, with Yum! ranking an impressive 32nd among U.S. companies. The strength of our talent is evident through Sean Tresvant's official transition to Taco Bell Division CEO on January 1st. Sean joined YUM in 2022 and is a visionary business leader with a proven track record of driving transformative brand building through his previous role as the Taco Bell Global Chief Brand and Strategy Officer. I'd like to again congratulate Sean as he takes the helm at Taco Bell, and I'm confident he and the rest of the team will continue to successfully deliver the brand's long-term global growth strategy. I'd also be remiss if we didn't take another opportunity to recognize Mark King for everything he did as Taco Bell Division CEO to set the brand up for future success, including handpicking Sean as his successor and ensuring that Taco Bell would be in more than capable hands. On behalf of the entire Yum! system, I want to thank Mark for his people-first leadership that drove strong results, inspired restless creativity, and solidified Taco Bell's unique brand identity that makes it an undisputed global icon. Additionally, PISA Global Chief Technology Officer Joe Park will be moving into the YUM Chief Digital and Technology Officer role currently held by Clay Johnson, who will continue as a senior advisor. I want to thank Clay for his incredible leadership since joining YUM in 2019, including developing our digital and technology capabilities from the ground up and establishing YUM as a clear leader in technology in global QSR. Since joining YUM, Joe formed our first ever long-range innovation team before moving on to Pizza Hut, our most digital brand, where he partnered with our global operations and technology leaders to deliver new levels of ease to our customers and improved unit economics for our franchisees. I'm confident he is the perfect person to lead us into the next chapter on our digital and technology journey. Moving on to the planet pillar of our good growth strategy, in 2023, we remain focused on efforts under our priority areas of greenhouse gas reduction and sustainable packaging. We've made progress on our goal of reducing greenhouse gas emissions nearly 50% by 2030 through investments in renewable energy and energy efficiencies in our restaurants and through ongoing commitments with our food suppliers. In terms of packaging, we are increasing our global use of more widely recyclable plastics in our consumer packaging And we continue to remove plastic packaging in the form of bags and cutlery in addition to eliminating styrofoam. Our continued progress in sustainability has been underscored by several recent recognitions, including being named to the 2024 Dow Jones Sustainability Index North America for the eighth consecutive year and being listed by Newsweek as one of America's most responsible companies for 2024. Before I wrap, I want to pay tribute to our incredible partners at Yum China. In December, my team and I traveled to Shanghai to meet with CEO Joey Watt and her executive team. That trip reinforced our view that Yum China is without question the world's most capable restaurant operator. They enable rapid growth and structural cost efficiencies through their dynamic development capabilities and their robust in-house supply chain. Our team sampled amazing new menu items in their innovation kitchen, We saw firsthand the digital capabilities that enable Yum! China to engage with an astounding 470 million members in its loyalty program. These advantages enable consistent paybacks of two to three years in KFC and Pizza Hut, despite evolving market conditions, further testament to their clear competitive advantages in the market. As I look back over the last year, the unique advantages of our diversified system shown through, While the business faced persistent inflation across the globe and navigated shifts in consumer sentiment stemming from regional conflicts, we responded with a focused determination to execute our growth plan, including growing units in 110 countries, meaningfully scaling our technology systems, deepening collaboration across our brands, and delivering both sales and profits well above our long-term growth algorithm. We're confident 2024 will be another banner year with a number of exciting sales driving opportunities, such as enhancing the range of protein offerings at Taco Bell, expanding new category entry points, and significantly boosting the impact of our loyalty program. With a world-class team, globally iconic brands, industry-leading franchisees, and a relentless appetite for growth, the future is brighter than ever, and I am confident that we will continue to maximize value for our shareholders. With that, Chris, over to you.