Yum! Brands, Inc. (YUM) Earnings Call Transcript & Summary

I'm Danilo Gargiulo, the restaurant analyst here at Bernstein. Thank you all for being here today. Before we start, let me remind you that you are able to submit questions through Pigeonhole by either scanning the QR code on your agenda or by visiting pigeonhole.at, with the pass code SDC2023. We are excited to have Yum! Brands again with us at the Strategic Decision Conference this year. Yum! is the world's largest restaurant company with over 54,000 restaurants in more than 155 countries, operating companies, iconic brands: KFC, Taco Bell, Pizza Hut and Habit Burger Grill. Global leaders of chicken, Mexican style food, pizza categories in a high-growth fast casual concept. Yum! Brands is a highly franchised, diversified business with an asset-light business model with a long-term growth algorithm which consists of 5% unit growth, 7% system-wide sales growth, which is resulting in at least 8% operating profit growth. With me today is David Gibbs. David, thank you for coming, Yum! CEO. David has been with the company for over 30 years, serving in a number of leadership position at 3 of Yum!young brand -- 3 of Yum!'s global brands. David has been the CEO since the beginning of 2020 and leads the company's overarching strategy, structure, people development and culture that drive global growth in sales and profitability. He previously served as the company's President and Chief Operating Officer. And then prior to that, he was President and CFO from 2016 to 2019, and he was the chief architect of Yum! Brands' financial, re-franchising and restaurant development strategy to transform the company into a capital-light pure-play franchisor. With that, let's get started.

Great.

So David, before we actually go into a deeper question, let's just set the stage for a moment. What is the most important takeaway that you would like investors to walk away with at the end of this conference?

Look, the most important word you should take away is unique. And that is nobody has the story that Yum! has. Nobody has the growth profile with these established, iconic, loved brands around the world, the capabilities of our franchisees. We have larger franchisees than anybody else, much more capable, much less levered. Nobody is building at the pace we are. We're building record sets of new units every year. Nobody has the culture and talent that we have. We'll get into all of this as we go through. But if I had to summarize it in one word, it would be unique. And there really is an analogy for us in our industry.

And investors can attend many conferences, so maybe let's start with the big bang. What is one comment or maybe one viewpoint that you haven't said before?

Yes. Look, the conference, I guess, is timed well for us. We just had a blowout first quarter, as you guys all saw. You saw the results, and yet our stock has pulled back. I don't normally comment on the stock because we're managing the business for the long term. But my one comment would -- that's a little different than in the past sessions like this would be, hard to understand the pullback given the strength of the business, given the fact that we even signaled on the earnings call that, that strength had continued into the second quarter. And all the things that we'll talk about that give you incredible conference -- confidence in the future of the business in the coming years. So...

Great. Now investors do have some concerns regarding the outlook of the U.S. and the outlook of the global consumer. So where do you think the consumer is healthier or weaker compared to what the market is expecting? And how do you think Yum! is going to be positioned in that type of macro scenario?

First of all, I understand that there's always lots of discussion at these conferences about the health of the consumer and trying to glean insights from the folks that present on that regard. We don't spend as much time worrying about the health of the consumer because our brands are built to be incredibly resilient and to win in every environment. That is our job. Our job is not to worry about whether the economy is going to be favorable for us or not. We can win in any environment. You take a brand like Taco Bell in the U.S. With the value that we provide, you could argue that a recession might be good for the brand, not bad for the brand in terms of people trading into the category. So what we -- now if you're asking what are we seeing in terms of the environment that we're operating in? If you go back and look at my comments on the last few earnings calls, it's been fairly consistent that -- we had this crazy environment they operated in the pandemic, which we navigated really well. And then things have been slowly going back to whatever the new normal would be, that looks a little bit more like the old normal. I've said that consistently in every call, that we see a little bit of people's savings accounts are probably not as robust as they were, but they're still spending. This is still an environment which our brands can succeed, as you saw from our Q1 results. And we think of it as a favorable trading environment. Inflation has pulled back, obviously. We're seeing more normal levels of food inflation. The pressure on wages and our ability to staff our stores has improved. Almost on any metric that you would look at and say, is this an environment in the U.S. and in most of the world that we should be successful? And the answer would be yes.

And are you seeing any key differences between the U.S. consumer versus the global consumer? Are there any pockets for which we should be watching out more carefully?

Well, I think most of the differences are usually on the upside. It does seem like there's lots of doom and gloom in a lot of the things you read, but that doesn't match up with the experiences in market. Take Europe for example. Given the war and some of the energy pressures and things like that, you'd think that our business would be struggling there. But just look at the results that we put up, that's not the case at all. So most of the upside -- most of the differences would be on the upside, like Europe.

And previously, you mentioned the commodity inflation coming down. And so after about 18 months, we're starting to see the inflation of food at home kind of getting closer to food away from home inflation. And there are questions around the traffic impact that this could have on the restaurant industry. So how do you plan to strategically position the firm in case traffic is going to slow down in the United States?

Yes. Obviously, an environment that's more normal probably has a little bit more focus on value than the environment that we've been in, in the pandemic. And if there's more pressures on consumers, we win in those environments. Back to my comment about Taco Bell. I mean, Taco Bell's got the $2 cravings menu that is incredibly delicious food at an amazing price, that it's called the cravings menu for a reason. So we can win in any environment. And I think we have some unique attributes in our business and particularly the brands that carry the majority of our business. Yum! is -- about 80% of our profit comes from Taco Bell U.S. and KFC International. Both of those businesses, I would describe as sort of category-of-one businesses. They don't really have any direct competition. They dominate in their markets. Their consumers aren't trading off of them versus others. And they both have ways of creating value for consumers that are really hard for the competition to compete with.

And let's step aside for a second on the macro environment and let's focus on the growth opportunities at Yum!. What do you think the investors are currently misunderstanding about your business?

I think there's -- always an interesting conversation. I'll just start with development -- about development. We've taken the pace of development up. We built 4,600 or so gross units last year, over 3,000 net. And the questions I usually get are the opposite of what I think -- how I think about it. They're normally like, "Can you keep this up?" And what all the conversations we have internally are how do we increase the pace? It's not about keeping it up. Nobody is trying to just duplicate what we did the previous year. We're always trying to take things to a higher level. And if you look at the fundamentals, there's every reason to believe that we can. So I think there's not a full understanding of how big the growth opportunity for our footprint is around the world because a lot of our investors are U.S.-based, they look at the business through a U.S. lens and they don't appreciate the upside that we have in places like Africa, India, China, where we -- and virtually every country. And by the way, in the U.S., we've got tons of upside when you think about the number of Taco Bells or KFCs we have relative to somebody like McDonald's. So I think #1 least appreciated thing is we're growing fast from a unit expansion, but we can grow faster. And we shared at Investor Day back in December, we have an opportunity to build another 100,000 units. The idea behind sharing that was to try to change the narrative about that, about this. But I don't know that, that's fully landed yet.

And some investors are worried about the credit tightening, especially here in the United States. So there is a mounting concern that franchisees may not have access to capital to potentially fuel the unit growth. So how do you think Yum! is positioned in that type of context?

Yes, I'll go back to my opening word, which was unique. Think about the pace -- all that development that I described, which is record-setting in the industry, never been seen before. 60% of that, roughly, was done by 15 public companies that are franchisees of Yum!. Those 15 public companies, their leverage is less than 0.5x. So when you talk about unique, when you're getting all your development out of self-generated cash flow from your businesses, you're completely immune to any changes in interest rates, basically, and you can self-fund that development, that's pretty unique. That's a nice competitive advantage. Nobody else has anything like that in their system. And just look at our Yum! China business. They have a pile of cash that keeps growing, and yet they're building at unbelievable rates. Even during the depths of the pandemic in China with lockdowns, they were opening units at record paces. So I don't think there's much of a concern about the environment impacting our ability to build.

And most of your brands have been -- actually, all of your brands have been accelerating in their kind of growth trajectory. So maybe, how would you describe each of your brands in one word relative to their journey to unlock their full potential?

Yes, this came up in some individual meetings. My overarching comment would be we are never satisfied with where our brands are. That's our mindset. We know we've only scratched the surface on the growth potential, both unit level economics, the top line of each unit, and the number of units we have around the world. So I mean, all of my descriptions of our brands are going to be, we've got a lot more that we can do to grow. You take Taco Bell, we obviously can grow our breakfast business. We're not in lunch in to the degree we should be. You take Pizza Hut, we're focused on creating more individual meal occasions in addition to the -- obviously, the way we own group occasions. KFC is moving towards more modern way of chicken with nuggets and sandwiches. So every one of us is really in the infancy and the early stages of reaching our potential at all of our brands. I wouldn't describe any of them as like we're satisfied or happy with where we're at.

Right. Before we get into the specifical of the brands, maybe can you help us remind what makes -- what are the advantages of a multi-brand franchisor like Yum!? So what is the underlying benefit of running and operating a platform across multiple global iconic brands?

Yes. I think this is probably an area of our company that is least understood because it's some of the softer things. There's some hard stuff in here also. But -- and these advantages that we have as being the largest restaurant company in the world by unit count, I think have only gotten to be more of an asset for us as the environment that we operate changes. So number one, we obviously have enormous scale. And that scale on purchasing. During the pandemic, we were able to keep supply when others weren't because we were the customer that cut -- suppliers were going to take care of. We're obviously able to produce supply at lowest possible cost. In the U.S. we have this purchasing co-op, for example. It's one of the largest in the United States that works on behalf of our brands. But that scale on technology. Being able to buy -- we're able to do lots of acquisitions of smaller companies that we can then scale that technology in our system. Our competitors can't do that because they don't have the ability to pay the same price for the acquisition and scale it across as many restaurants as we do. So this environment sets up for us to be the leader when it comes to proprietary technology in the restaurant industry because of that scale. We have an advantage at Yum! by having a collection of brands and the scale that we have when it comes to culture and talent. It's always been in our DNA, being -- having been part of PepsiCo to be -- to have the best culture and the best -- and as a result, the best talent in the world. You look across the restaurant industry, who's leading all of the restaurant brands? You'll see a lot of people that graduated from Yum!'s training programs to go lead other brands. We're proud of that, that we are -- we churn out CEOs, and that we have such a deep bench. And we're able to attract talent that would not come to us if it wasn't for the culture and it wasn't for the scale of our business, which means there's so many different opportunities people have. I brought Joe Park, who leads our Pizza Hut digital and technology work, with us to the meetings today to help him share some of the stories about what's going on at Pizza Hut. Joe joined us from GE and then Walmart. I mean, you don't get talent like Joe unless you have the kind of scale that our business has and the reputation we have for attracting talent. The other major advantage we have is we have a lot of franchisees that are within the Yum! system. So we have some of the greatest franchisees in the world, larger, more capitalized, more capable, as I talked about before. They like staying within the Yum! world and being a franchisor of our brands because they know they can trust us and because of the relationship we've built with them. That's another advantage of having multiple brands and being able to keep them and their growth ambitions within our system.

And I think another element that kind of contributes to the strength of the platform is also the kind of marketing capabilities and the know-how. Maybe can you describe the journey since you acquired Collider Lab, and how this has been impactful for your businesses?

Well, so you know some of our secrets. Like Collider is one of our secrets that we talk about but people don't fully get. It was an acquisition that we did 7 or 8 years ago of a group of PhDs that study consumer behavior and consumer trends around the world. And it has proven to be an absolute game-changer for us. We had been working with them as an outside firm. And that's how a lot of our acquisitions come about, particularly in technology. We work with some companies, we like what they do. And we say, "Well, let's just buy them and bring them in-house so we can really scale them at lowest possible cost." So Collider has -- will go around the world, work with our franchisees and different businesses that we have around the world, charge for their services, but we just charge it out at profit neutrality. So it's a great deal for the system. And they really know our business. They can identify where we have gaps and what we're doing in terms of bringing a brand to life with their marketing programs, redirect the brands. And as you can imagine, insights in that part of the business and getting a brand on a slightly different track can make all the difference between success or failure. So Collider has been an absolute home run for us. We were talking earlier about the book that Ken Muench, the leader of Collider, wrote about, R.E.D. Marketing, relevant, easy and distinctive marketing. If you're interested in how Collider helps influence us, I suggest you read the book, and you'll get a sense for the impact it can have on our business.

Great. And maybe let's move on to specific brands. Maybe let's start with KFC. Your plan to unlock the next leg of growth stands on 3 pillars: easy experiences, explosive development and endless craveability. So maybe let's start with development, since it's a focus for you personally. So in the past 10 years, the pace of new openings has increased from about 3% to over 7% today. So this acceleration is even more impressive with kind of KFC scale today, and the fact that KFC has over 60 -- 70 years of experience. So how did Yum! drive this acceleration in unit growth? How do you think it's sustainable going forward?

The great thing about development is it's really hard. It has lots of different variables that all have to be right. The reason I say that's a great thing about it is it's nobody can -- it's not easy to replicate. We're at a pace of development that I think would be very hard for our competition to replicate. But we've been spending years getting all the building blocks in place for that, the kind of growth that you just referred to. It all starts, obviously, with unit economics. If our franchisees are happy with the returns they're getting, they're going to keep building. Yum! China is one of the public companies that reports their unit economics. They talk about 2- to 3-year cash paybacks on the new KFCs they built. Obviously, that's a massive value creation every time they build a store. But the complexity of getting development right, from the technology that we're now using to help select sites, to the scale that we have on supply chain to make sure we get equipment to our franchisees at the lowest possible cost. And then the flywheel that you get going when you -- the more stores you build, the easier it is to build the next one because you've now got more storage, you've got more of a marketing contribution, that moves the top line on each individual unit, which allows you to have better unit economics, which allows you to build more stores. And that flywheel just keeps going. So it's not -- you can't snap your fingers and just decide to ramp up the pace of development at KFC. You got to have the right franchise partners and you've got to have some of these markets that, around the world, they've got to scale and started to see the benefits of that scale move the top line and improve unit economics. And it is one of those things that I think, back to my earlier comment, it gets better and better every year. It's not like it gets harder to sustain it, it gets easier to sustain it and grow it because of all the synergies you get from building stores the previous year.

So what's creating the upside for the franchisees as you're moving into these new units? You mentioned Yum! China having better economics than in the past algorithm. So what's creating this additional opportunity?

Well, look, I think our brands have never been more relevant -- not just KFC, have never been more relevant and better connected to consumers because of things like Collider and the way we're evolving our menu options around the world. And all of that is just creating this virtuous cycle where, as consumers flock to our brands, we build more stores and we get more name recognition and we get more marketing dollars. It is all just one big positive cycle that just keeps repeating itself. And even -- we're building a ton of units in China. If you dissect our numbers at KFC, you'll see there's a lot in China. But we're growing outside of China fast as well. Our numbers outside of China keep going up every year. And we haven't really even turned on the development engine in the U.S. yet, but I can tell you, when we build a new store in the U.S., it vastly outperforms our existing stores in the U.S. That, to me, is a sign of a really healthy development opportunity. That means the state of the stores that we have, a lot of our KFC U.S. stores, are not in the shape we want them to be because they are older stores that need some investment, and we're going to do that. And we are doing that. But at the same time, when we build the perfect new store in the right trade area, it performs really quite well. So we've got -- we've only got 4,000 KFCs in the U.S. Obviously, we can double or triple that number. So every way you look around the world, there's opportunity to build lots of KFCs, and we're capitalizing that, but really getting just started.

And speaking about the kind of the newer stores and the new formats. There is about 40% of dine-in sales that are coming from kiosks today, and with great economic returns for the brand. There is a 20% check lift for you and as well as for your franchisees, which obviously expands kind of their EBITDA and their willingness to continue to work with you as a franchisee. But what do you expect in terms of acceleration of the kiosk rollout kind of globally? So what's your ambition for kind of the technology in store for KFC?

Yes. Obviously, kiosks is a no-brainer idea in this environment. Consumers in the last few years have been trying to use technology for everything. So even when they come into our stores now, it's not as hard a sell to get them to go to the kiosk instead of the front counter. And we've seen that in the numbers that you just cited. We've got specific markets where we've converted the whole market and seen really nice lift in check, South Africa being one example. So our plan is obviously to have kiosks in every restaurant. We have plans for lots of things to have in every restaurant, though, and we've got to sequence the capital investments for our franchise partners and be mindful of how they spend their money, building new units, remodeling stores, investing in kiosks, investing in digital menu boards, you name it. There's lots of different initiatives that we've got, all of which have nice returns for them. But they're -- we've got to make sure that we're sequencing them out over the certain number of years. So we won't have kiosks in every store by the end of this year, but I imagine we will over time because it just makes too much sense.

And are you seeing any different approach between kind of the U.S. consumer in terms of digital adoption versus the international consumer, again, in terms of digital adoption?

There's always been differences around the world in terms of digital adoption. We knew that early on when it comes to how -- consumer behavior because of the Pizza Hut brand. Pizza Hut was -- in some circles, Pizza Hut was credited with the first online retail transaction in the history of the Internet. That may or may not be true, but it shows you how far back we go in terms of being a technology brand at Pizza Hut. And we know that online ordering varies a lot around the world, although it keeps growing everywhere. And our vision for all of our brands is to have every transaction be a digital transaction. Not just as like a provocative thought, but the reality is I think we're going to the point where 100 -- 99% of our transactions are going to be digital at some point in the not too distant future because it's just a much easier way for a consumer to order and it's much more profitable for our franchisees. It's a win-win-win.

Great. And then finally, maybe let's talk about craveability. The chicken category has been exploding domestically, internationally. What's compelling consumers to shop at KFC? So why are consumers excited about the offering that you have?

Obviously, we invented the category in the restaurant industry with KFC, and I think we're viewed as the original. You think about like the colonel himself and that imagery. There are surveys that say that's the most recognizable, iconic logo in the world over any other brand. So I think when people think of chicken, they think of KFC first. And we've been evolving the forms of our chicken to what consumers define as craveable today. The biggest part of our business, every one of our leaders, their biggest challenge is constantly evolving the business to stay in touch with consumers' taste. And I think we -- the reason our brands are 60, 70 years old, but still feel like young relevant brands, is because we have amazing marketers and business leaders that have been able to do that. Chicken is the world's preferred protein, KFC is the leader in chicken in the world in terms of our footprint and the consumer appeal, and this all just sets up nicely for a continued acceleration of the growth rate at KFC as long as we keep staying connected to consumers and their changing tastes.

And how do you -- so on KFC, how do you think about kind of the long-lasting impact of your brand? So how do you make this connection with consumers continue over the long run? What's creating this moat around the brand?

Look, that's another definition that changes. Consumers are more concerned with ESG issues and things like that, and we're constantly evolving the brand to be relevant to today's consumers' taste. But at the end of the day, it's a brand that has very broad appeal. There's something for everybody at KFC. We have -- buckets in the pandemic obviously shot up because of family meal and sharing occasions. We sort of own that occasion with the bucket, with an iconic bucket logo. But at the same time, we have all these great individual meal options with sandwiches. We just launched nuggets in the United States. So I think a brand -- we have breakfast in certain markets, that's -- we've only scratched the surface there in terms of what that can be. I think the best brands are the ones that can stretch themselves and meet many different consumer needs and different occasions. KFC clearly fits in that category.

And maybe also if you can comment on, recently the strategic positioning of the menu, allowing you to capture both the low end of the consumer as well as the high end of the consumer. So can you walk us through like the -- kind of the strategic rationale behind kind of some of the new launches and how you were thinking about capturing a broader share of the consumer?

Yes. In the U.S., for example, we launched 2 wraps for $5, which I think I talked about on the last earnings call as being something that resonated with consumers as a way to react to the changing consumer environment in the U.S. And nuggets is obviously another example of a lower-price-pointed item that is connecting with consumers for how they want to consume chicken today. I think the brand has all the tools in its toolkit to do that. We've got new leadership in the U.S. if the folks aren't aware of, with Tarun Lal coming in. He's a veteran of the KFC and Pizza Hut business. Been with us for, I think, over 30 years. Started as a restaurant manager. He's been successful everywhere he's been around the world by being disruptive and making changes to the business. We're seeing some of those changes start to take hold in the U.S., along with Nick Chavez, our Chief Marketing Officer. And I think they're doing a great job of building that business and connecting better with consumers, which is always a challenge.

Great. And maybe let's move on to Taco Bell. What has created this resonance with consumers in the United States? Then we're going to move on to international. But the United States, it seems like a different Taco Bell compared to the early 2000s, as an example.

Yes. Well, look, Taco Bell is obviously an amazing success story, and it has just gone stronger every single year in terms of its ability to connect with consumers, both through the products that they offer that are completely differentiated. There's no comparison to Taco Bell. We always joke that we're the only one selling a chalupa, and nobody knows what a chalupa should cost. That's a pretty good place to be with your menu. Because we can provide great value to consumers, we don't have to play a commoditized game. And we have all the tools to do amazing innovation within every restaurant. I mean the tool -- the make table at a Taco Bell, where we have all our ingredients, can be combined in many different ways, in many compelling, innovative ways. And they've got a pipeline of innovation that is incredibly exciting. So the brand has gotten stronger because we've had great -- great leaders at the brand, great marketers at the brand that have connected with consumers, and because it's got a very unique business model that doesn't really have any direct competition. And we always call it a category-of-one brand, and you can see the power of being a category-of-one brand in the U.S. So I think, just as there's been more acceptance of Mexican or Mexican-inspired food, we've grown along with the category, and we're obviously the leader in the category.

And moving on to international now. So you recently announced the 100th unit in China, bringing to 4 the number of countries that have more than 100 units in Taco Bell. So can you maybe elaborate how Taco Bell's drove this success versus the past attempts into international expansion?

Yes. I mean, it all started with first having a dedicated, focused team at Taco Bell working just on Taco Bell International. In the past, we would have leaders that would manage a geography for Yum!, and they would have Pizza Hut, KFC and Taco Bell. So of course, with very few Taco Bells, it didn't get a lot of attention. So we structured an organization and have built that organization up over the time, so we now are investing significant G&A in building out Taco Bell internationally. Then you had to get some markets to these inflection points of, when you get over 100 units, that's when your supply chain starts to get some synergies and your food costs start to come down. Most markets around the world don't produce tortillas. That's not a common product in most countries, as an example. So we have to establish supply chain. It's often very expensive for the first few units. But once you get to 100-plus units, now all of a sudden, your food costs start to come down and you can see profitability improve markedly. And then there's -- Taco Bell, unlike KFC, for example, we talked about the appeal -- the global appeal of chicken widely known all around the world. There's virtually no country that doesn't consume chicken. Taco Bell is a little bit of an education process. We've got to educate people about what a taco is and why this food is appealing. Now the world that we're in today, with social media and -- the world feels much smaller. So we can come -- we go to countries. I'll talk to consumers in Taco Bell in some countries that we enter. And they'll say, "Yes, I've known Taco Bell for years, even though we haven't been there." Because they know it from social media. They follow stuff that goes on in the United States. They might watch a basketball game and see a U.S. basketball game and see a Taco Bell promotion. So they know the brand. It's easier to get people familiar with the brand today than it might have been 10 or 20 years ago. But there is an education process. But once you get past all that and you get to the scale of units, now you've got sort of a moat around your business, the category-of-one brand with great margins and a great new unit profile. And that's why you're starting to see it take off. That's why Yum! China is investing in it, and all the other markets.

And during in the Investor Day back in December last year, you were commenting on some of the exploding-growth type of campaigns that emerged in some of these countries. When you see a taco, you basically -- you can see a taco basically everywhere, in every shape the world. So can you maybe help us understand how you're planning to evolve your education strategy now that you're becoming a bit more known in these global markets?

Yes. Look, I still think we have a lot of work to do in terms of just getting consumers familiar with Taco Bell and seeing it as an everyday option. So you'll probably see us focus on that in most markets around the world for the next few years. Because 100 units is nice, but 1,000 units-plus is our goal in all these countries -- in all these large countries that we operate in. And that's still going to take some time. So yes, I think the other thing is it's always been a little tricky, is it a Mexican brand? Is it a U.S. brand? I think the team has settled on it's a little bit of a California-inspired brand. And so we're using that as a way to communique in our communication materials. So I think we have a well thought-out plan in terms of how to build the brand. And the big difference today is people in other countries can see, okay, that's working now in these countries that are getting to scale, so there's a lot more confidence in the franchise system. We just had a franchise convention in Singapore with our 1,500 franchisees from around the world, mostly KFC and Pizza Hut franchisees. And I couldn't count how many times I had those franchisees come up to me and say, "I want to bring Taco Bell to my market. I want to bring Taco Bell to my market." They just had a chance to sit in on the presentation from the Taco Bell leadership team, hear their story, hear about the growth in other markets, and they can connect the dots and see, "Okay. This is going to be big everywhere, just like KFC and Pizza Hut. I want in."

And you just mentioned a question ago that there is an opportunity for Taco Bell to capture a greater share of the breakfast day part, the lunch day part. And also during the Investor Day, you mentioned that there is a potential unlock of $1 billion sales that could be coming from these 2 day parts. So can you help us understand where you are in that journey? Maybe like what's the kind of the inning number that you're in, in terms of capturing that opportunity?

Certainly, on breakfast, we're in the first inning. That can be a much bigger idea. And some of you have probably seen the campaign that we've done with Pete Davidson. That's really brought some attention to breakfast. We're seeing a positive result from that. We're seeing some growth in lunch and we've got some products lined up to really take that to the next level. But back to my earlier comment. We're not satisfied with anything that we have at any of our brands in terms of them reaching their potential. And we're in early innings on just about every initiative.

Great. Let's move on to Pizza Hut. Pizza Hut has been gaining momentum. Can you maybe share your thoughts on the strategic actions, such as the Melts and the My Box! or the strategic partnership with aggregators. And how do the initial results from your strategic repositioning of the brand is playing against your initial expectations?

Look, we're very pleased with the results at Pizza Hut from Q1. You all saw the numbers, particularly in the U.S., and I think it's a direct result of the initiatives that you just mentioned. By embracing the aggregator model but doing it on the terms that make sense for us and our franchisees, we're processing a lot of orders through aggregator marketplaces that are coming to Pizza Hut. Those are customers that may not have had Pizza Hut as top of mind. There's a decent amount of incrementality to accessing those customers, and we're doing it in a way that we're preserving our franchisees' profitability. So the aggregator piece has been helpful to us. I think we shared, we're getting 60 orders a week out of Pizza Hut now just through the aggregators. Clearly -- a few of those would be trade-offs from orders that might have come in our normal channels. But clearly, the vast majority of those are incremental, so that's great. The initiatives that Aaron Powell, who we recently brought on as CEO of Pizza Hut, doing an amazing job. The initiatives that he's ignited around the world to start leaning in more on becoming more of a younger, everyday brand with more individual offerings, like My Box!, which is more popular outside the U.S. And then in the U.S., what we did with Melts at a $6.99 price point is really enough food for 2 people, but it's priced for 1. You compare a $6.99 meal to like a combos at a typical burger, fries and a drink, you can see how that's a pretty competitive offering. And if you haven't had one, I encourage you to get one because it's unbelievably craveable, delicious food. So that's working well. And you'll just see more of that from us. So I don't -- versus our expectations, our expectations are always high. We're starting to have some -- make a lot of progress on Pizza Hut on the things that really matter for the long term. So I'm excited about it.

But the shift from occasion brand on to becoming every day and maybe more individually catered brand also requires some level of education of consumers. So how long do you think it's going to take for consumers to embrace that this is a new Pizza Hut? And how do you think this is going to be impacting the long-term results for Pizza Hut going forward?

Yes. I mean just to be clear, Pizza Hut itself is the most loved brand in the pizza category if you talk to consumers. It's got the most equity in different products, like Stuffed Crust Pizza, Pan Pizza. We've invented -- anything exciting that ever happened in the category was invented by Pizza Hut. We don't need a new Pizza Hut, we just need to do at Pizza Hut what we need to do at Taco Bell and KFC, which is just keep evolving the business model for today's taste, which is less of a dine-in brand, more of an off-premise brand. We've made great progress on that in the last few years, closing a lot of dine-in stores in the U.S. and starting to build these delivery units. So the mix of our pipeline of stores that we're building around the world has now shifted to be more delivery/carryout, which is great. We're making progress on digital with -- thanks to Joe's help in terms of the digital mix and the proprietary technologies that we have. So we're not looking to throw away the old Pizza Hut and build a new one, we're just looking to build on what is a great, iconic brand and continue to evolve it for today's consumer.

And what sets you apart? You mentioned digital. What sets you apart from your peers in terms of digital capabilities? Maybe not just reflecting on Pizza Hut's strength, but across your brands.

Really going back to the scale advantages that we have. Some of you have noticed, we've done a number of technology acquisitions. We have this unique ability to see different companies out there. We're in 160 countries with 55,000 restaurants. Nobody else is interacting with all the technology companies in the restaurant industry the way we are. We can pick and choose the ones that we uncover and then go ahead and acquire them and bring them into our system. Because of our scale, we can do that while our competitors can't. And then we can then provide that technology to our franchisees at prices that nobody else can provide to them. That is a huge competitive advantage. We bought a company like Dragontail, for example, that is helping us process orders in the back of our restaurant and shaving time off of our deliveries, making our drivers more efficient, giving customer faster food that's hotter, fresher. So we have these advantages at Pizza Hut because it's part of the Yum! world and because, itself, it's such a big scale business that we're really leaning into. And that goes back to my earlier comment about, I think, the environment with technology, particularly at Pizza Hut, sets up for Yum!'s advantages to become even more and more important as we move forward.

Great. Now since we're talking about digital, what does the AI agenda look like for Yum!? So what are the areas that are most affected? How big is the opportunity for you? And how should we think about the effect on the margins for the company, given your scale?

Yes. Like a lot of the conversation around AI, this is a very -- it's a big positive for our industry, and it should be a big positive for Yum!, and that's how we view it. There's only so many things I'm going to talk about publicly that we're working on. But as you can imagine, it's not a secret that we process a lot of orders using human beings and their voice. But voice AI in places like the drive-thru and phone orders, obviously, could have a massive impact on our franchisees' unit economics and the efficiency of our restaurants. But we're using AI technology and video to confirm order accuracy. I don't -- maybe that's one that people haven't thought about. But if you have cameras in the back of your restaurant and you've taken pictures of the pizzas when they're coming out of the oven, you can confirm if everything was made according to what was ordered. Maybe they put too few pepperoni on. So you can improve the quality of the product, just as looking at one little discrete application of it. So I do think AI is going to change how we do -- how we run our business, and all of the changes will be positive for the consumer and very positive for our franchisees and unit economics.

What are some of the most advanced technology that you think we're going to be talking about 5 years from now?

That would be like a great example of something I wouldn't share. But I mean, the world -- I've sat in a lot of discussions of AI just with other CEOs of other businesses. And there's lots of change coming, and we expect to be on the forefront of that. Before Joe Park took over running digital and technology for Pizza Hut, he ran our innovation team. For those of you that don't know, we created an innovation team at Yum! several years ago just to lean in on new technologies. We haven't really talked about robotics and what automation could do. But restaurants that are run much more efficiently with the benefit of robotics, removing the dirty and dangerous jobs from humans and giving them the more interesting jobs, is obviously a big part of this journey.

And going back to the benefits of the platform from a marketing standpoint. Why can't the viral marketing success that you're seeing at Taco Bell be copied by other QSR peers? Again, like what sets your part in this journey to create something which is relevant and long-lasting that cannot be necessarily replicated? So what's your competitive advantage in this case?

Look, we've got a history at Taco Bell of being a brand that is exciting for consumers to interact with. In fact, I saw once, there was a survey done of why people go to Taco Bell. Normally, people go to restaurants in the restaurant industry because they're hungry, they craved a certain piece of food, type of food. I think the #1 reason why people go to Taco Bell that they had cited was they wanted some -- their day was boring and they wanted some excitement. So when you think of the brand as a brand that just brings excitement to you, that opens up the lens for how we interact with them from a marketing and consumer standpoint. Other people don't have that option. They don't -- other brands aren't viewed that way. So we've built this reputation, and we just keep enhancing it. Whether it's what we did more in the last few weeks with trying to free Taco Tuesday. Or for those of you that hadn't heard about that, we're trying to make sure that -- somebody has a trademark to that, and we're trying to free that, and we've got LeBron James helping us do that. To back a couple of years ago when we opened up the Taco Bell Hotel in Palm Springs and re-skinned an entire hotel in the Taco Bell theme and invited our most ardent fans to come experience the Taco Bell Hotel. All that stuff builds brand buzz in a way that, over the years, has just created a moat around us as one of the brands that connects with consumers in a way that nobody else can.

And previously, you also mentioned the longevity of your connection with consumers also stems on your ability to focus on ESG agenda and make sure that there is a long-lasting impact of your brands and memory across the consumer. So given the importance of ESG globally, what are some of the key initiatives that Yum! is taking to expand their ESG agenda? What is one item that you're most proud of?

Look, at the highest level, if you didn't see our Investor Day, we think of our recipe for growth as 4 initiatives that we're working on to grow the business, around marketing, development, the operations, culture and talent. And then we think of our recipe for good, the good that we can do in the community. And that's around food, people and planet. So that's really our ESG agenda. Those 2 things together are our recipe for good growth. They don't sit separately, they work together. The more we can do to be a responsible citizen, the more we connect with consumers, the more appeal for our brands. And that's another one of those virtuous cycles. So on the food, people and planet agenda, there's lots of things that we're doing that I'm proud of. Obviously, we've made commitments around a 50% reduction in our carbon footprint by 2030 and zero carbon footprint by 2050. But one of the things that I just was involved in recently that was really cool is, under the people pillar, we talk a lot about unlocking opportunity, creating pathways for the 1.5 million people that work in our restaurants to become franchisees, to get the corporate jobs, like Chief Operating Officer of Taco Bell who started as a team member, for example. We did a promote -- we did a program to take MBA students at Howard and the University of Louisville and put them in like a Shark Tank kind of competition, where the winners got a chance -- were awarded a franchise in one of our restaurants. So these students -- I actually got to sit in on them pitch why they should get to become a franchisee. Our franchisees partnered with us to do this. We awarded franchises to a number of them. They are now being trained by our franchisees, and then they will be spun out with their own store. So that's an example of creating pathways and the good that we're doing in our community -- on the people pillar. But there's so many more examples around the world of all 3 pillars, honestly.

Great. Since we're approaching the end of our time, maybe let's think about the outlook, near term and then long term. So maybe, given the outlook guidance that you have provided, where do you think you have the highest near-term convictions? And what are you watching more closely, given how the operating environment is changing?

Well, again, we're focused on how our business and the resiliency of our business, and connect with consumers in any operating environment. And I think we're confident. We just raised -- for those of you who don't know, we raised our long-term growth algorithm back at our investor conference in December. Obviously, we're off to the races in terms of our performance against that so far this year. And I'm very confident in our ability to hit that algorithm over the long run, and we're always working to try to raise that algorithm. So I don't really have any areas of concern for us. We're a big business where we've got 300 combinations of brands and countries. They're not all performing perfectly at every point in time, but I think we have lots of reasons to believe that, in aggregate, the Yum!'s growth is going to continue to accelerate and continue to -- we're going to continue to be this unique combination of 60, 70-year-old brands, but a high-growth company that's growing faster now than it's ever had in its history.

How do you think Yum! will be different in 5 years from now?

In 5 years from now, we're going to have a lot more restaurants because we're going to build a lot more. And probably, if I had to guess, 5 years from now, we'll probably have another acquisition or 2 along the lines of the acquisition we did with The Habit, because we're -- all these advantages that we have of our scale, we can apply them. We're learning, we can apply them to something like The Habit or any other brands, we think, and bring out synergies and create more growth opportunities for our franchisees, who want to stay within the Yum! system, but are looking for more brands to franchise.

So given the many opportunities that you have across development, your stores, building your brand. So how do you plan to balance your capital allocation priorities?

I don't think -- we're a franchise model, so I don't think our capital allocation model really changes. It's always about investing in the business, paying a competitive dividend and then returning excess cash to shareholders. In this environment, we may not take on more debt to return -- to buy back shares given the interest rates and bumping up against interest deductibility. Maybe that's the only change right now. But I think our model works great. And the beauty of it is we don't need a lot of capital to accelerate our growth because our franchise partners are putting up their capital because they believe so strongly in the brands.

And to unlock your growth, what do you think is the hardest decision you will have to make in the next 5 years?

I mean, the hardest decisions we ever have to make are around people. They are the most important decisions we make. Everything we do starts with culture and talent and putting the right people in the right spot. So they're hard because we have so many good choices and so many talented leaders, that figuring out how to best help each one of them realize their potential and where to put them, I feel a lot of responsibility in that regard. But that's like a fun-hard decision. I mean, some of the other harder decisions are obviously around as we roll out technology, the business is going to transform a lot over the next few years. And how to do that with our franchisees, make sure that it's profitable and we're doing it in the most efficient way. I'm sure that's going to be a challenge. As the world changes from AI, that's going to create a lot of new hard challenges for us.

Excellent. David, thank you very much for joining us.

Thank you.

Thank you, everybody, for participating.