Yum! Brands, Inc.

Hello, welcome to the YUM Brands 2024 Second Call to Earnings Call. My name is Lauren and I'll be coordinating your call today. There will be an opportunity for questions at the end of the presentation. If you would like to ask a question, then please press star followed by one on your telephone keypad. We kindly ask that you limit yourself to one question only. I will now hand you over to Matt Morris, Head of Investor Relations to begin. Please go ahead.

Thanks, Zapater. 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 the 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 our 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 currencies. As a reminder, several Yum! Brands business units report on a period calendar basis, including all US and Canada brands, KFC UK, and KFC Australia. When forecasting 2024, please keep in mind 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 reports section of the IR 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 the upcoming Yum! Investor events and the following. Our third quarter earnings will be released November 5th with a conference call on the same day. Finally, on our last call, we shared the timing for our Taco Bell consumer date originally planned for December of this year. We are finalizing a revised date for early next year. Please 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. Despite the continued challenging operating environment, I'm pleased Diom was able to deliver 10% growth in core operating profit this quarter thanks to our team's strong execution and progress on the initiative laid out on our last call. While we take comfort in improving global trends and still expect the first quarter will mark the low for same-store sales growth, significant volatility remains and we recognize sales in some markets are not where we want them to be. The impacts from the Middle East conflict, in addition to a more cost-conscious consumer, have presented headwinds to same-store sales. Despite these tougher waters, we are confident we will deliver on profit growth in line with our long-term algorithm for 2024 and are set up for continued strong growth in 2025. Fortunately, we are well positioned to navigate these consumer headwinds given the strength of our brands and reputation for value no matter the environment. Nonetheless, ensuring we provide consumers affordable options has been an area of greater focus for us since last year, with all of our brands having offered disruptive deals and introduced or reintroduced attractive everyday value. With examples in the U.S. such as KFC's Taste of KFC deals, Pizza Hut's $7 deal lovers and Taco Bell's cravings value menu. As a result, our brands experienced improving trends relative to the first quarter in the U.S. market, and we continue to refine our offerings in international markets to recapture similar momentum. The second quarter offered signs of improving fundamentals. For example, at Taco Bell, we've begun to see sensitivities to check management stabilize to improve from Q1 into Q2 and have witnessed year-over-year check growth led by items per transaction. Internationally, KFC markets, excluding China, that we believe were not impacted materially by the Middle East conflict, reported an encouraging mid-single-digit increase in same-store sales. Across our system, our 2024 commodity inflation has come in lower than we expected heading into the year, helping our franchise partners navigate recent sales volatility. Furthermore, momentum in the critical and strategic areas of our business remains strong. This includes robust increases in digital sales, progress leveraging our scale, continued deployment of our proprietary technology ecosystem, and efficiency improvements in our cost structure from efforts underway in the next phase of our journey to be a leading global digital restaurant company. Our twin growth engines, Taco Bell US and KFC International, helped Yum! deliver 3% system sales growth driven by market share gains at Taco Bell US and strong unit growth at KFC International. Combined, these two powerful business units delivered 7% operating profit growth. At an individual level, unmatched innovation fueled Taco Bell US's 7% increase in system sales, with Cantina Chicken performing above our expectations. Taco Bell is a clear standout in today's environment, not only achieving same-store sales growth well ahead of the QSR category, but delivering restaurant-level margins near a record high. In addition, Taco Bell's same-store sales grew mid-single digits across all income cohorts, proving that craveable innovation, even at a higher price point, wins with today's consumers. At KFC International, on a quarter-over-quarter basis, same-store sales showed strong improvement on a two-year trend, and unit growth in the quarter was an impressive 9% year-over-year as franchisees take advantage of strong paybacks. I know from experience this powerful brand is not constrained by expansion opportunity, but rather its growth and success are tied closely with having the right franchise partner. This is why we are very intentional about who we choose to allow into our system. For example, our new franchise partner in South Korea took over in April 2023 and has drastically improved performance with same store sales up 17% this quarter. In that vein, the KFC team is tirelessly working to give our franchisees the tools to succeed, including furthering the expansion of Super App and the KFC Global Loyalty Program, which is now live in 14 markets. 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 provide an update on our second quarter results, followed by our bold restaurant development, unmatched operating capabilities, and balance sheet position and capital strategy. Beginning with the KFC division, which accounts for 49% of our divisional operating profit, we grew system sales 2% led by 8% unit growth. Our same-store sales were down 3% largely on account of scattered pockets of weakness in a number of markets relating to the Middle East conflict and underperformance in the U.S. market. This quarter, we did not see an improvement in the most directly impacted markets. If Q2 trends hold, the pressure on same-store sales growth for the set of directly impacted markets will begin to abate as we lap the prior year's sales impact beginning in November. Beyond the most significantly impacted markets of the Middle East, Malaysia, and Indonesia, we've seen sales impacts from the Middle East conflict surface in several other markets based on store performance comparisons across neighborhoods. In other parts of the world, we witnessed trends improve from the first quarter, including Canada and Central and Eastern Europe, while South Africa's transactions began to improve during the quarter. Another exciting development in the quarter was Yum China celebrating its 200th K coffee, which consists of an adjacent storefront that is part of an existing KFC, allowing a reduced investment and lower operating costs from sharing KFC kitchen facilities. The Yum China team has averaged one new K coffee per day since the beginning of 2024. While these do not count as new units in our system, they are a driver of future same-store sales growth. This quarter, we acquired 216 KFC restaurants in the UK and Ireland, and we have started to optimize restaurant operations there. Lastly, KFC digital sales, excluding China, grew nearly 20%, with an impressive 40% growth in kiosk sales. Moving on to the Taco Bell division, which represents 37% of our divisional operating profits. U.S. same-store sales grew 5%, outpacing the U.S. QSR industry by a wide margin. Taco Bell executed its winning formula this quarter through introducing a variety of compelling innovations, such as the Cheez-It and Secret Art Bark Fries. The second quarter also reflected sales contribution from the Cantina Chicken menu, our foray into an elevated chicken offering and a new platform to innovate around. Since the platform's launch, Taco Bell's chicken sales mix has increased 10 points, with nearly one in four orders including a chicken cantina item. Another part of the team's winning formula is digital, in which digital sales continued to grow at a breakneck pace. In Q2, Taco Bell's loyalty sales were up over 30%. At Taco Bell International, the team is working on building brand relevance. It is still early days in many markets and trends remain volatile, but we remain confident in the long-term opportunity. A restored emphasis on value has forced our teams to be creative with a more limited national marketing budget. In more mature markets within Europe, which accounts for over 40% of Taco Bell International System sales, we saw encouraging signs of improvement with the introduction of value offers. Next, I'll discuss our Pizza Hut division, which accounts for 14% of our divisional operating profit. System sales were flat this quarter, and units expanded 3% year-over-year. International same-store sales remained negative, in part because of a stalled recovery in Malaysia and Indonesia. We're encouraged Pizza Hut same-store sales trends have improved four points from last quarter, with progressing trends in the U.S. and encouraging recoveries in Thailand and Hong Kong. Around the world, our team is actively expanding MyHutBox and introducing Melts, including most recently in India and Thailand. Both platforms lift underdeveloped day parts, expand individual meal occasions, and provide attractive price points to our consumers. Since joining Pizza Hut as CEO in 2021, Aaron Powell has assembled an amazing team and is providing strong leadership to drive efficiency, increase accountability, reduce complexity, and align the brand to consumer trends. In the US, momentum accelerated throughout the quarter with an increase in weekly per restaurant average transactions attributable to a number of value-based promotions and the launch of MyHutBox. Lastly, at the Habit Burger Grill, Second quarter system sales declined 1%. Habit's restaurant count increased 5% year over year. As a result of new regulations in Habit's home market of California that have raised the cost to do business, Habit's leadership team has been focused on protecting profitability to remain competitive. Those efforts led to a comprehensive store-level labor optimization effort, which contributed to an impressive 520 basis point expansion of restaurant-level margins from the first quarter, despite a double-digit increase in restaurant-level labor rates in California stores. Same-store sales growth remained suppressed, but were encouraged by the improvement from first-quarter trends despite a more challenged regional backdrop. Subsequent to quarter end, I was pleased to learn Habit's Double Char Burger reigned supreme in USA Today's 10 Best Reader's Choice Award for Best Quick Service Burger, landing the number one spot and beating out all other QSR and Better Burger competitors. Now I'll turn to our good growth strategy, starting with our people pillar. One of Yum's hallmarks is our people-first culture, which drives recruitment of amazing talent and also builds a deep bench of leaders within the organization. I'm excited about the great work going on at Pizza Hut from a talent perspective, where we recently welcomed Carl Laredo as the brand's U.S. president. Carl is a seasoned marketing leader with deep experience in delivering impressive results at some of the world's largest and best-known brands. We also welcomed former PepsiCo executive Kalen Thornton as global chief brand officer, leading the Pizza Hut division's global brand strategy and marketing, including harnessing the power of engaging consumer connections across physical and digital touchpoints. It is also rewarding to see leaders from Yum's deep bench of talent assume bigger roles. Melissa Freebay recently joined Pizza at U.S. as Chief Marketing Officer after spending 27 years at Taco Bell in various finance, marketing, insights, and brand strategy positions. In addition to recruiting and promoting talented professionals, we're furthering our culture of collaboration and building capability across our company in powerful forums such as KFC's annual global marketing planning meeting. KFC gathered marketing leaders, franchise partners, and vendors from around the world to share best practices and consumer insights to keep our iconic brand red, discuss innovative strategies, and sample delicious products from various markets. Moving on to the planet pillar of our good growth strategy. We are making progress on our global goal of reducing greenhouse gas emissions nearly 50% by 2030 with a focus on renewable energy and energy efficiencies in our restaurants and ongoing collaboration with our food suppliers. For example, KFC has reduced emissions by focusing on key areas such as cooking and holding systems, refrigeration and cooling, and lighting, while Pizzas and Taco Bell are collaborating with partners to reduce on-farm emissions and encourage sustainable practices. In terms of packaging, we are making progress against our global goals, with many markets eliminating unnecessary plastic items like straws, cup lids, stirrers, and cutlery. And finally, we're also making a meaningful impact in the communities we serve by continuing to unlock opportunities. As an example, in Thailand, KFC partnered with nonprofits and the Thai government to launch the country's first-ever flexible learning curriculum to help students who dropped out of school gain critical job and entrepreneurial skills. To wrap up before handing over to Chris, we are pleased our second quarter built to a 10% growth in core operating profit despite system sales pressures. While our teams work to improve system sales trends, we are confident the investments we are making in tandem to be more agile, resilient, and stronger as part of the next phase in our technology journey will lead to a promising year in 2025. All these efforts underscore our commitment to be the franchisor of choice and deliver more, better, faster, cheaper, and safer technology services to our partners. I'm excited about our plans to harness the power of AI, including the expansion of drive-through voice AI technology, with plans to roll this capability out to hundreds of Taco Bell U.S. stores by year-end, in addition to testing with KFC in an international market. We are hard at work driving the next phase of our technology journey to unlock future growth by strengthening our business resilience and ensuring we deliver exceptional shareholder value in the years ahead. With that, Chris, over to you.