Yum! Brands, Inc. (NYSE:YUM) Q2 2023 Earnings Call Transcript

Yum! Brands, Inc. (NYSE:YUM) Q2 2023 Earnings Call Transcript August 2, 2023

Yum! Brands, Inc. misses on earnings expectations. Reported EPS is $1.05 EPS, expectations were $1.23.

Operator: Hello, everyone, and welcome to the Second Quarter 2023 Yum! Brands Incorporated Earnings Conference Call. My name is Emily, and I’ll be coordinating your call today. [Operator Instructions] I would now turn the call over to Jodi Dyer, Vice President of Investor Relations. Please go ahead, Jodi.

Jodi Dyer: 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. 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 third quarter earnings will be released on November 1, 2023, with the conference call on the same day. Now I’d like to turn the call over to David Gibbs.

David Gibbs: Thank you, Jodi, and good morning, everyone. At our Investor Day last December, we shared our long-term vision for Yum! to deliver accelerated global growth. I am proud to say that our second quarter results are further evidenced by our ability to execute against this vision. Through Yum!’s differentiated capabilities our bold restaurant development engines including 1,025 gross new units in the current quarter, and our distinctive digital capabilities, which drove record digital sales fueled the second quarter’s 13% growth in system sales. I’m especially pleased to report that based on our strong year-to-date results and the continued momentum we see in our business, we expect to deliver full year 2023 results, well above our long-term growth algorithm.

I’ll cover the few high-level thoughts on our second quarter results before sharing some additional details through the lens of the relevant, easy and distinctive brands, and unrivaled culture and talent pillars of our Recipe for Good Growth framework. Chris will then provide some additional color on our second quarter results, followed by an update on our bold restaurant development and unmatched operating capabilities, Growth Pillars. For the second quarter, we delivered same-store sales growth of 9% and unit growth of 6% with KFC setting the pace with a remarkable 19% system sales growth on the foundation of our industry-leading development momentum, distinctive marketing campaigns and relevant new product layers, such as the launch of original recipe hand breaded chicken nuggets here in the US.

And as I’m sure you’ve all heard, Taco Bell, in partnership with another global icon, LeBron James successfully liberated Taco Tuesday in a way no other brand could mimic. As we also discussed in December, our Recipe for Good Growth strategy will be powered by digital and technology. Our distinctive digital capabilities, which enable easier experiences and greater access to our iconic brands continues to unlock incremental sales through higher spend and frequency, as well as incremental profitability for our system. On that note, I’m pleased to report another quarter of double-digit growth resulting in $7 billion in digital sales, representing over 45% of our global system sales. Turning back to our Recipe for Good Growth and our iconic Red Brand, let me start with the KFC division, which represents 50% of our divisional operating profit.

Second quarter system sales growth of 19% was driven by 13% same-store sales growth and 7% unit growth. Widespread transaction growth and a strong recovery in our China market as Yum! China detailed in the results earlier this week, powered our same-store sales growth. However, even outside of China, is the global same-store sales growth was up an impressive 10% in the quarter, KFC represents our largest digital business globally on a dollar basis and showed continued momentum with strong year-over-year growth in both digital sales and mix. Among KFC’s emerging Markets, I’d like to highlight our Middle East team for the work they did to drive system sales with a focus on their core menu and new snacking product offerings and the South Africa team for their efforts to grow the breakfast layer through a bold marketing campaign with Trevor and Noah.

Thanks to unlocking additional customer use occasions, compelling value offerings and continued digital growth both markets posted strong same-store sales growth. Among our developed markets, Western Europe led the way with strong results in check and transactions by balancing disruptive value and core menu items. Turning to KFC U.S., same-store sales grew 5%, improving sequentially with the combination of product innovation and an always on value strategy. Building our first quarter, momentum behind wraps, KFC U.S. launched hand breaded original recipe chicken nuggets to expand its off the bone chicken offerings leveraging the learnings from our significant off the bone business at KFC International. This product innovation was met with an immediate positive consumer reaction, resulting in over 100 million nuggets sold in the first eight weeks after launch.

These boneless offerings appeal the younger and new KFC customers and builds upon an already well-established sales layer following the successful launch of the chicken sandwich in 2021. Moving on to the Taco Bell division, which represents 35% of our global divisional operating profit and roughly 75% of our U.S. divisional operating profit. Once again, I’m thrilled to share more external recognition of Taco Bell’s brand power and relevance with the brand’s inclusion on the Time 100 list of the world’s most influential companies. This category of One Brand remains ever relevant by pushing boundaries and introducing and reintroducing exciting and craveable menu items and always being part of the cultural moment and conversation. Congrats to the entire Taco Bell team and our incredible franchisees for yet another well-deserved honor.

For the second quarter, Taco Bell’s global system sales grew 7% led by 4% same-store sales growth and 5% unit growth. Taco Bell continues to execute its magic growth formula through a balanced set of commercial strategies including building brand buzz, unparalleled value, mass occasions, and digital initiatives. This quarter, the team launched a campaign to liberate Taco Tuesday in a first-ever global Taco Tuesday, campaign spanning 19 markets in partnership with a true global icon LeBron James. The campaign created massive brand buzz with engagement, and mentions in one week for taco Tuesday Liberation surpassing the entirety of the highly successful Mexican Pizza relaunch last year. Other promotions in the quarter contributing to Taco Bell’s winning magic growth formula includes both our $5 Cravings Creo and Deluxe Build Your Own Cravings Box that help sustain our strong consumer value proposition and maintain over.

25% margins. In addition an expansion of trading hours with strong growth at both the breakfast and late night dayparts, helped Taco Bell’s second quarter results. Finally, the team continues to create incremental demand for their digital channels. In the U.S., digital sales increased almost 35% year-over-year with kiosks now deployed in 100% of Taco Bell stores. Taking all of this into account, it is no surprise Taco Bell continues to be a leader in value perception, while also delivering amazing unit economics. For Taco Bell International, system sales grew 18%, driven by development momentum. The global Taco Tuesday Campaign, which launched in June and will continue through the third quarter, leverages Taco Bell’s, US cultural leadership building brand equity and consumer awareness with a consistent look and feel around the world.

I also want to highlight Taco Bell’s continued progress against our Recipe for Good Growth strategy that included raising $20 million so far this year through its Round Up fundraiser. Throughout the quarter to the Taco Bell Foundation donated these funds to over 400 non-profits and nearly 1,000 live mass scholarships. Next I’ll discuss the Pizza division, which accounts for 14% of our divisional operating profit. System sales grew 7% for the quarter, driven by 4% same-store sales growth and 4% unit growth. Pizza Hut International grew system sales 11%, led by 6% same-store sales growth and 5% unit growth. The individual occasion continues to be a growth driver largely on incremental transaction growth from the Melts platform, which in the US has proven to be a self-sustaining layer at an attractive entry price point.

Since launching in the U.S. late last year, Melts has now reached 35 markets, up significantly from the 11 markets in the first quarter, now in over half of our global store base. Melts is delivering encouraging early results alongside My Box, our other international individual occasion product offering. Our team is focused on providing distinctive value offerings across markets such as the Super Limo Abundant Value deal in the UAE and the National Pizza Party promotion in Australia. Pizza Hut U.S. grew system sales 2%, driven by 1% same-store sales growth. In the U.S., we introduced new flavor profiles to our Melts platform, providing yet another reason for customers to order from Pizza Hut. The Habit Burger Grill division grew system sales 9% on 7% unit growth.

The Habit team continues to lean into its menu strategy of Culinary Forward limited time offerings, highlighting its craft brand positioning through their elevated craveable offering. We continue to expand access points for our customers with the rollout of kiosks now in over 60% of stores on average kiosk sales peaked 10% higher checks, compared with front counter sales and excellent profit flowthroughs, yet another proof point of the value from converting to digital sales. Moving to our unrivaled culture and talent growth driver, which continues to be the foundation of our success, to start, I’d like to recognize Taco Bell division CEO Omar King, who will retire at the end of the year as we celebrate the legacy that Mark will leave at Taco Bell we’re thrilled that Sean Tresvant will become the CEO of the Taco Bell division effective January 2024.

Sean joined Taco Bell’s Chief Brand Officer two years ago and earlier this year, expanded his role to Global Chief brand and Strategy Officer. With Sean’s clear vision and strong track record of driving transformative red innovation, I’m confident the Taco Bell will continue to successfully execute its long-term global growth strategy. This is a great reminder of how people are truly at the center of everything we do, which is also reinforced in our Global Citizenship and Sustainability report, which was published last month. The report outlines our strategic investments in socially responsible growth, risk management and sustainable stewardship of our three priority pillars of people, food and planet. I’d like to take a moment to highlight work on key issues across each pillar, including the quality, packaging, and carbon reduction.

We remain committed to our purpose of unlocking opportunity in part through our $100 million commitment over five years that we announced in 2020 to knock down barriers to equity inclusions, education and entrepreneurship around the world. Through our unlocking opportunity initiatives, we have funded and activated more than 30 social impact programs in 11 countries, enabling markets to develop localized programs to deliver meaningful change in communities where we operate. We also continue to make progress towards achieving gender parity and leadership roles by 2030, with 43% of global leadership roles held by women in 2022. These are just two examples of the great progress we’ve made and that how Yum!’s commitment to its people first culture has never been stronger.

In addition, we continue to make progress around sustainable packaging, building upon our harmonized cross-brand packaging policy that was introduced last year. Furthermore, we’ve had great success as we March toward our climate goals to reduce our greenhouse gas emissions by nearly 50% by 2030. To-date, our teams have achieved a 57% reduction in greenhouse gas emissions at corporate restaurants and offices, coupled with a 28% reduction at franchise restaurants. Reflecting on the first half of the year, our teams have put forward an impressive set of results. And looking forward, the picture we see for the second half of the year will be similarly strong. Our confidence comes from our Recipe for Good Growth strategy and the fact that category leaders Taco Bell US and KFC International drive 80% of Yum!’s divisional operating profit.

The vast majority of our U.S. operating profit is driven by Taco Bell, the leading brand in both cultural relevancy and affordability, while globally, KFC is positioned with unmatched scale advantages and growth by the franchise partners eager to capitalize on opportunities in their markets and widen their competitive mode. In an uncertain environment, we know that consumers make decisions with value in line with good news is that our brands have always stood for tremendous value in addition to convenience, experience, and craveable food. This is a winning combination that will continue to differentiate us from our competitors and when coupled with our Recipe for Good Growth strategy, I am confident that we can continue to deliver on our long-term vision for accelerated global growth in 2023 and beyond.

With that, Chris, over to you.

Christopher Turner: Thank you, David and good morning, everyone. Today, I’ll discuss our second quarter financial results and our bold restaurant development and unmatched operating capability growth drivers before turning to our capital strategy. I’ll begin with our second quarter results. We delivered 13% system sales growth, driven by 9% same-store sales growth and 6% unit growth. Digital sales improved at all four of our brands with total digital sales up nearly 30% year-over-year. Core operating profit for the quarter grew 12%. Taco Bell store level margins were an impressive 25.6%. We continue to expect full year Taco Bell company-operated margins to be similar to margins in 2022. Taco, Bell’s ability to deliver such strong margin performance, despite mid-single-digit inflation, once again demonstrates the power and resilience of their business model and preserves their compelling unit economics, which remain near an all-time high.

For Habit, company-operated margins improved to 11%, thanks to better leverage of Yum!’s purchasing scale, as well as efforts to improve store level labor productivity. We’re encouraged with the margin improvement progress at Habit and we’ll continue to invest in the long-term growth of the business and as a result, we expect a small operating loss for the division this year. Ex-special general and administrative expenses $280 million, in line with our expectations. The Ex-special tax rate for the quarter was 18%. Finally, our second quarter EPS, excluding special items was $1.41 per share. Second quarter EPS was positively impacted by unrealized investment gains of $0.09, relating to our investment in Devyani, offset by a negative foreign currency translation impact of $0.05.

Given our strong first half results, and continuing momentum into the second half of the year, I’m happy to report that we expect on a full year basis, to over deliver on all components of our long-term growth algorithm. We expect full year 2023 core operating profits to grow low-double-digits, which is ahead of our long-term guidance of at least 8%. We expect second half G&A expenses to be modestly higher, relative to our initial plan, primarily attributable to above target incentive compensation accruals resulting from our strong performance and which we began recording in Q2. As a reminder, employee incentive compensation is tied to internal performance targets, linked to components of our long-term growth algorithm. The accrual we book throughout the year can go up or down depending on our performance.

Consistent with our prior GNA guidance, we still expect our year-over-year G&A growth to be lower in the second half of the year. Balance of year, we expect the third quarter year-over-year G&A growth rate to look similar to the growth rate in the first half, followed by a year-over-year decline in the fourth quarter. Finally, we’ve faced a $44 million, foreign currency headwind year-to-date and our current forecast is for little to no FX impact to reported operating profit in the balance of the year. Now moving on to Bold Restaurant Developments, we opened 1,025 gross new units during the quarter contributing to 6% unit growth. We are encouraged by the excitement among our growth ready franchise partners who see broad consumer appeal for our brands and enormous white space opportunity in their markets and who are enthusiastic about Yum!’s unmatched operating capabilities.

We continue to expect that the benefits of our scale and the health of our franchise system will allow us to further widen our development advantage relative to the industry. As you’ve heard me say before, the Yum! system is made up of world-class franchise partners who are truly 3C, Committed, Capable and well-capitalized. As a result, we expect 2023 will be another incredible year of development similar to 2021 and 2022, which were both industry record-setting years. Let me share a few highlights of our unit development in the quarter beginning with the KFC division, which opened 600 gross new unit. Yum! China’s development momentum re-accelerated 375 gross new units opened this quarter, putting their year-to-date development ahead of last year’s pace.

The remainder of KFC’s unit growth was widespread across markets, led by India, The Middle East, and Asia. As for the Pizza Hut division, the team opened 357 gross new units, led by China, India, Spain, Turkey, and the US, with each opening at least 20 units. In June, The Flynn Restaurant Group announced its first international expansion with an agreement to acquire Pizza Hut, Australia, which owns approximately 260 Pizza Hut units. This is a great example of a 3C partner eager to grow within our system. For those unfamiliar with the Flynn Restaurant Group, they are the largest franchise operator in the U.S. restaurant industry with roughly 2,400 restaurants, including nearly 300 Taco Bells and nearly 1,000 Pizza Huts. For some perspective, in 2022 Flynn accounted for roughly 20% of the Pizza Hut U.S. new builds and their overall, same-store sales growth significantly outperformed the rest of the U.S. system.

Taco Bell development remains on track for another record-setting year with 63 gross new units, including 27 in international markets across eight countries. Totaling it all up, Yum!s first half unit development reflects nearly 1800 gross new units, a fantastic result that demonstrates the resilience of Yum!’s development engine, despite a more challenging macro environment. Next, I’ll turn to our unmatched operating capabilities that contribute to our position as the global franchisor of choice. This includes our distinctive digital strategy to unlock improved customer experiences that lead to faster sales growth and better store level margins. With that, let me discuss the three pillars of our digital strategy. Beginning with the Easy Experiences Pillar, this quarter, the KFC US team leveraged the Yum! commerce platform, which was first launched with KFC.

U.S. in 2021 to enable a Diablo for limited time promotion in partnership with Activision Blizzard and offered customers exclusive in-game rewards in exchange for KFC purchases. By leveraging our in-house technology, we were able to build the necessary infrastructure and integration to support this exciting gaming promotion in a matter of weeks. Previously, the process would have taken months with significant third-party expense. This quarter, we achieved a significant milestone in expanding the Yum! Commerce platform as Taco Bell U.S. migrated its digital traffic onto the platform. All of Taco Bell’s web, mobile, and Delivery-as-a-Service digital transactions are now processed through this platform. Additionally Pizza Hut Peru became the first international Market to begin using the Yum! commerce platform this quarter.

We will continue to migrate additional brands and markets to the Yum! commerce platform over the coming quarters, including Pizza Hut U.S. throughout 2023 in several international markets. Within the Easy Operations pillar, we continued to expand adoption of both recommended ordering and our Yum! point-of-sale system. As you may recall, recommended ordering is an AI machine learning module that predicts and recommends the quantity of each product a restaurant general manager should order. Recommended ordering was deployed in another 800 stores this quarter and is now live in over 4400 KFC and Taco Bell U.S. stores. Our Yum! Next-Generation Cloud First point-of-sale system improves operational efficiencies and enhances team member effectiveness.

Taco Bell U.S. is leading this rollout having deployed this system to 1,000 stores this quarter and targeting 5,000 stores by year-end. Finally, for our Easy Insights pillar, we are advancing our digital strategy and using a new customer data platform solution to provide a unified view of customers across our US brands and third-party aggregators. This will enable us to improve digital experiences for our customers and ultimately increase customer frequency. Eventually, this and other internal programs will provide the infrastructure to unlock personalized marketing, joint branding and future automation. This is the latest step in our vision to One Day Achieve 100% of sales powered by digital. Lastly, I’ll provide an update on our balance sheet and liquidity position.

As a reminder, our strategy is to enable growth, while maximizing shareholder value. In doing that, our capital priorities remain unchanged, investing in the business for the long-term, maintaining a resilient balance sheet, paying a competitive dividend and maximizing shareholder value by returning excess capital through debt paydowns and share repurchases. Net capital expenditures for the quarter were $34 million, reflecting $60 million in gross CapEx and $26 million in re-franchising proceeds. Our net leverage ratio declined to 4.7 times, reflecting our previously stated intention to allow net leverage to drift modestly lower this year. Keep in mind, we have an upcoming bond maturity of $325 million in November of this year, our only maturity until 2026.

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Furthermore, our current outstanding debt has a weighted average remaining term of six years and our greater than 90% fixed floating ratio is attractive in the current market environment. We paid down $164 million on our revolver, leaving a minimal balance at the end of the quarter. We continued to evaluate the best use of our excess capital and at current interest rates, we believe funding our upcoming debt maturity before share repurchases best optimizes shareholder value. To round out our prepared remarks, I’m incredibly pleased with our strong, year-to-date results and continued momentum giving us confidence, we will deliver full year 2023 results well above our long-term growth algorithm. Our brand teams and franchise operators remain vigilant in the pursuit to maximize performance and in turn deliver exceptional shareholder value.

With that, operator, we are ready to take any questions.

Q&A Session

Operator: [Operator Instructions] Our first question today comes from the line of Dennis Geiger with UBS. Dennis, please go ahead. Your line is now open.

Dennis Geiger : Great. Good morning folks and thank you. I wanted to ask a question on the 2023 outlook commentary for growth well ahead of the low double-digits. Could you touch, maybe a bit more on the momentum that you spoke to heading into the second half including any sort of visibility that you have into the top-line, which I think is particularly encouraging in the current environment? And then, any additional puts and takes to profitability beyond the helpful callout that you mentioned on the call? Thank you.

David Gibbs : Yeah. Look, as far as the second half of the year, obviously, we’re confident. We’re well above algorithms. We confirmed that in our prepared remarks, just to give you a little visibility in why we feel that way, Taco Bell U.S. for example has got very strong momentum as we come into Q3. They’ve launched value. And if we look at all of our businesses on a two-year sales trend, which I think evens out some of the anomalies. We see basically a continuation of what we saw in the first half of the year.

Christopher Turner: And then, Dennis, on the profit trends, we mentioned that we now expect full year core operating profit to be low-double-digits. And I think we gave a lot of color in my comments earlier on the drivers of that around G&A and expectations in the back part of the year continuing trends from the first half in Q3 and then a year-over-year decline in Q4. We’re also pleased to have improving margins in our company operated store based. You saw a 200 basis point improvement there in our biggest – driven by improvements in our biggest store bases and we’re going to continue to manage that. I don’t think there’s anything else to call out in terms of color on back part of the year.

Operator: Our next question comes from the line of Brian Bittner with Oppenheimer & Co. Brian, please go ahead. Your line is now open.

Brian Bittner: Thanks. Good morning. You’ve consistently said that Yum! brands is built to showcase blue chip like resiliency, positioned to win in any environment and that dynamic seems to be proving out with 9% same-store sales growth in the second quarter. And you seem to be pointing to a continuation of healthy trends. Can you just help us understand what the drivers currently are for this resiliency? And if you believe the macro has indeed become more challenged recently across your portfolio despite obviously, continuation of very strong results?

Christopher Turner: Sure. And I appreciate the commentary. Just, as far as, why are we able to navigate this kind of environment? Look, I have a lot of confidence in our brand leaders and our marketing teams around the world in so many ways we’re writing the playbook for how to build brands in this industry. We have Collider which is an internal group that provides so much to us in terms of our – the inside time and consumer behavior. And I think that’ll just shows up in the way we build these brands being top 100 brands in the world. As far as the macro challenges, this is an environment that I would say is a more than normal operating environment. We’ve come out of a series of years where things have been a little bit more different than we’ve ever had in the past.

But I wouldn’t, call it a difficult environment to operate in. One way to think about it is, just to breakdown, our markets between developed and emerging. In the developed markets, we saw mid-single digit sales growth is quarter. It’s a stable positive environment and we’re past really inflation peak in most markets, obviously, in the US that’s been well documented. And this is an environment where we can succeed. Value is rising in importance. But we have solutions and in many ways, our leaders with our brands. KFC for US, for example, in the quarter, their most growth was seen in their low-income consumers, because they had always on value for the quarter, as I mentioned in my prepared remarks. So we can win in this environment and develop markets.

Similarly, Western Europe has been documented as a challenged environment for a lot. For us, we had good results there. Our French and German markets did a great job of mixing innovation and value, and delivering strong growth there. So, developed markets, little bit more of a return to normal, more stable and our brands are built to win in those markets. In emerging markets, it’s a little bit of a different story. We’re seeing double-digit sales growth for the quarter. Little bit more vary, but in general, we’re not past the peak of inflation in a lot of these markets. So, we’re still taking pricing some of these markets over that inflation, able to pass it on to consumers. But very importantly, we’ve got positive transaction growth in those markets.

So, we’re still growing our share in the industry, at the same time, we’re navigating a little bit more challenging environment in those emerging markets. But when you add it all up, as you said, we’ve proven to to demonstrate how resilient our brands are and how we can operate really in any environment and win.

Operator: Our next question comes from the line of Jon Tower with Citi. Jon, please go ahead. Your line is now open.